Principal Issues: Whether costs of renovation of rental property are capital expenditures or current expenses
Position: General comments
Reasons: Question of fact
2009-034849 XXXXXXXXXX Charles Rafuse 613-247-9237 February 18, 2010
Dear XXXXXXXXXX :
Re: Rental Property Renovations
This is in response to your letter of November 10, 2009, concerning the proper classification of expenditures incurred to renovate a rental property.
You have indicated that you and your husband own a house in joint ownership that has been used to earn rental income. This summer you had renovations made to the house costing approximately $20,000. You have asked if these costs should be treated as capital or current expenditures. You have also asked if you could claim a rental loss against your income from other sources.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to offer the following general comments, which may be of assistance.
There are no fixed rules when determining whether an expenditure is on account of income or on account of capital. The courts often look to what, from a practical and business perspective was the purpose of the expenditure. The jurisprudence suggests a number of guidelines that may be relevant, but also suggests that no one guideline is determinative. The main four guidelines that the courts have identified as being relevant to the determination are "enduring benefit", "maintenance or betterment", "integral part or separate asset" and "relative value". These guidelines, along with some others, are explained in the Canada Revenue Agency's (the "CRA") Interpretation Bulletin IT-128R, paragraph 4.
Of particular importance to your situation is the guideline in paragraph 4(b) of IT-128R. This paragraph provides a discussion on whether an expenditure is considered to be maintenance because it restores a capital property to its original condition (likely a current expense) or a betterment because it materially improves a capital property beyond its original condition (likely a capital expenditure). Further as indicated in paragraph 4(b), where all of the expenditure, but for a minor part, is of current nature, the CRA is prepared to treat the whole expenditure as being of a current nature.
The guideline dealing with relative value in paragraph 4(d) of IT-128R would also appear to be helpful in determining whether in your situation the expenditure was on capital or current account. This guideline looks at the maintenance and repair costs in issue in relation to the value of the whole property or in relation to previous average maintenance and repair costs. The courts have found the repair cost to be a current expenditure, generally, in cases where this cost only represented a low percentage (lower single digit) of the fair market value of the whole property (including integral components).
As regards rental losses, they can generally be deducted against other sources of income.
More information regarding rental properties and the computation of rental income and losses can be found in the CRA publication T4036, Rental Income, available on the CRA website at www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Yours sincerely,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch