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Capital or Expense
Everyone in business, or with a rental property, is faced at some point with the decision as to whether an expense is capital or current in nature - in other words, whether the cost should be capitalized or expensed. There are general guidelines that can be followed to determine the answer, but these guidelines don't always fit the situation.
Current expense: | recurring expense for the replacement, maintenance or renewal of a specific item; |
| useful life of the item purchased is relatively short, generally one year or less; or |
| the cost of repairs simply maintains or restores an asset to its original condition |
| the asset has the same functionality after the work as before the work |
| the work does not increase the profitability of the asset |
Capital expenditure:
| a separate asset has been acquired, and the item purchased provides a lasting or enduring benefit, generally having a useful life of more than one year |
| a repair cost incurred improves or enhances the original asset beyond its original condition |
| a repair cost is incurred to repair used property acquired, in order to make the property suitable for use |
Capital vs Expense Court Cases
An excellent example of the capital vs expense conundrum was decided by the Tax Court of Canada in Aon Inc. v. The Queen, 2017 TCC 166, with the decision of the court allowing the re-roofing cost of over $4 million as an expense. See the Video Tax News analysis of this decision.
Repairs And Maintenance Costs in Real estate Rental Business: Canadian Tax Lawyer Guide from Taxpage.com discusses court cases where, contrary to CRA guidelines, the costs incurred were found by the court to be repair expenditures, not capital expenditures.
From vLex Canada re Gold Bar Developments Ltd. v. MNR (1987), "The court stated that what was done by the taxpayer was "neither more nor less than was required to replace the deteriorating and dangerous brick condition", nor was it a "voluntary expenditure with a view to bringing into existence a new capital asset for the purpose of producing income, or for the purpose of creating an improved building to produce greater income"."
Mixed Business and Personal Use of Property
Items that can be expensed but are used partly for business use and partly for personal use would be expensed according to the percentage of business use. Capital items that are also used partly for personal use would be capitalized at 100% of the cost, and depreciation would be determined each year based on the % of business use. See, in CRA's guide T4002, Personal use of property under "Special situations" in Chapter 4.
TaxTips.ca Articles
Business Expenses - What expenses can I write off against my business income?
What expenses can be deducted from property rental income?
Canada Revenue Agency (CRA) Resources
T4002 Self-employed Business, Professional, Commission, Farming and Fishing Income Guide
Business Expenses, with links to more information on each type of expense
Revised: November 05, 2024