Rental Property Repair Planning: Is it a Capital or Current Expense?
While you’re planning out your year and trying to decide on renovations to your rental property, it helps to know what qualifies as a capital or a current expense. It may be attractive to do a larger renovation for the tax credits, but you may have to break it up over multiple years if it qualifies as a capital expense. It’s helpful to sort this out in advance, so you have the right mix of capital and current expenses in a given tax year.
What are Capital and Current Expenses?
Current expenses will reduce your tax liability on your tax return for the year they were performed. Capital expenses must be depreciated over time over a multi-year period. Both serve as liability reducers; you just can’t claim an entire capital expense in one year, where you can claim all current expenses in one year.
What Qualifies as a Capital or Current Expense?
Anything that you do in the regular course of maintenance for your rental property, such as repairs, would fall in the current expense bucket. Anything that provides a lasting benefit or advantage, according to the Canada Revenue Agency (CRA), is a capital expense.
The CRA tries to further clarify the difference here, where it gives examples of current and capital expenses. There’s also a value distinction; if the cost is a “considerable value” in relation to the property value, it is a capital expense. Thomson Reuters further breaks down the differences citing case law here.
Let’s take that into the real world – you’ve replaced a furnace, a large expense, but one that is obviously necessary. Technically, it isn’t a capital expense as you aren’t improving the property, and it isn’t a large value in relation to the property value.
It would be a capital expense if you were doing something like switching from regular roof shingles to a metal roof, since it will provide a lasting benefit. Let’s get back to planning – you probably don’t want more than one capital expense in a current tax year, since the benefit for that year to you will be minimal, even if it helps in the long term.
Get an Accountant for More Complex Returns
If you’re having a hard time deciding which expense category your improvement falls into, have multiple properties, or have a return that isn’t fairly straightforward, consider using an accountant to file.
They’re always on top of changes to the tax code and can probably find things that you need to pay or can write off that you wouldn’t know of on your own. While you won’t get in trouble with the CRA for claiming a capital expense as a current one, you will likely have a reassessment and the resulting headaches that come with that.
Highgate Property Investments Can Manage Repairs & Renovations
Being property managers for so long, we’ve formed important relationships with multiple contractors in many different fields. Proactive maintenance is vital to preventing more costly repairs down the road, and our landlord clients are alerted to anything they may have to do on a regular basis. We can manage repairs or renovations even for those who aren’t our regular clients. Get in touch with us to find out what we can do for you!
