Principal Issues: [TaxInterpretations translation] Whether certain costs incurred in connection with major repairs to a rental property - and certain costs incidental to those repairs - are deductible in computing the taxpayer's rental income for the year?
Position: Question of fact. Some of the expenses are deductible while others are not.
Reasons: Interpretation of the Income Tax Act; jurisprudence.
XXXXXXXXXX 2005-011755
October 26, 2005
Dear Sir,
Subject: Request for Technical Interpretation: Statement of Real Estate Rentals
This is in response to your letter dated February 14, 2005, requesting our opinion on the above subject. We apologize for the delay in responding to your question.
Facts
Your letter states the following:
- In 2000, you purchased a single-family, split-level home that already had a tenant;
- Your intention in purchasing this property was to continue to earn rental income;
- In 2004, the tenant of your building passed away;
- Following her death, you incurred the following expenses:
- Long distance charges (approximately $200);
- Travel expenses between your principal residence and the location of your rental property (approximately 3,500 km);
- Accommodation and meal expenses incurred while in the municipality of your rental property;
- Fumigation, spraying, disinfection and demolition costs (approximately $6,550);
- Fumigation, spraying, disinfection and demolition costs were incurred due to the strong odours emanating from your building.
Question
Your letter states the following question:
Are you able to deduct the above expenses incurred as a result of your tenant's death from your rental property income for the 2004 taxation year?
Analysis
Pursuant to section 9 of the Income Tax Act (the "Act"), a taxpayer's income from a business or property (in your case, the property is a rental building) for a taxation year is the taxpayer's profit for the year therefrom. According to the jurisprudence, profits from carrying on a business or from property must be accounted for using a method that is consistent with the Act, with principles established by the jurisprudence and with generally accepted commercial practices.
For the purposes of our analysis, we will review the various expenses that you have incurred since 2004 and that we have described above. In doing so, we will review certain general principles that apply to the deductibility of expenses incurred to earn income from property as well as the principles applicable to the specific expenses you wish to deduct.
For expenses to be considered deductible under the Act, it should be noted that subsection 67(1) stipulates that an expense, to be deductible, must always be reasonable in the circumstances. This determination is one of fact that is made following an assessment of all the relevant circumstances.
Long-distance charges
Where a taxpayer incurs expenses for the purpose of earning property or business income, such expenses will generally be deductible under the Act.
In light of the facts that you have presented to us, it would appear that you have incurred long distance charges in order to settle the complications caused by the death of your tenant in anticipation of the future rental of your building.
For that purpose, we consider those expenses to be deductible in computing your rental income for the year in which they were incurred.
Travel, meals and accommodation expenses
Subsection 18(1)(h) prohibits the deduction of any amount incurred as a personal or living expense, other than travel expenses incurred by the taxpayer in the course of carrying on a business while away from home. Consequently, unless you incurred those expenses for the purpose of earning income from a business or property, you will not be able to deduct those expenses from your rental income for the 2004 taxation year.
As such, it is necessary to know the context in which you incurred those travel expenses and to determine whether those expenses allowed you to earn rental income. From your letter, it would appear that your travel expenses were incurred to monitor and manage the situation arising from the death of your tenant and not to earn income from the property.
In addition, because of the clear prohibition in paragraph 18(1)(h), we confirm that you cannot deduct in computing your rental income the meal and living expenses that you incurred while staying in Longueuil, as those are personal and living expenses.
Attached is a copy of Guide T4036, Rental Income.
Fumigation, spraying, disinfection and demolition costs
In order to determine whether an expense is deductible in computing income from a business or property, one of the questions to consider is whether the expense is a current expense or an expense on capital account.
The Act contains a general prohibition against a taxpayer deducting any capital expenditure from the income of a business or property. In addition, a capital expenditure cannot be fully deducted in the year in which it is incurred but is instead subject to the capital cost allowance regime in the Act.
Interpretation Bulletin IT-128R outlines the key elements to consider when determining whether an expenditure is made on a current or capital basis.
For example, an expenditure made in respect of a property for the sole purpose of restoring it to its original condition is normally considered to be a current expense that may be deducted in computing income in the year in which it is incurred. Similarly, case law has determined that an expenditure made in respect of real property in anticipation of its rental is incurred on a current basis and not on capital account. We have provided you with a copy of Interpretation Bulletin IT-128R for further guidance on this subject.
In light of the facts that you have communicated to us, it appears that the fumigation, spraying, disinfection and demolition expenses that you incurred were incurred not only in anticipation of the future rental of your rental building, but in order to solve the problem of bacteria and odours that you had since the death of your tenant. Thus, we are of the view that those expenses are current expenses and can be deducted in the year they were incurred.
Trusting that this is satisfactory,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Encl.