An individual owning a duplex with one unit occupied personally and the other rented out by him as a source of income, undertakes major work on the rental unit of a capital nature and also of a deductible nature (to repair normal wear and tear). In order that the dwelling can be vacated for the estimated one-month duration of the work, the individual pays $5,000 to the tenant to compensate for the storage of some of the tenant's furniture, moving costs and the costs of temporary accommodation and for the inconvenience.
After noting that, under the Quebec Civil Code, a landlord may not make non-emergency improvements or major repairs requiring the temporary evacuation of the housing unit without offering the tenant compensation equal to the reasonable expenses incurred by the tenant as a result of the evacuation, CRA stated, regarding whether the compensation payment would be a capital expenditure:
[I]f the purpose of the work was to improve the housing unit for the purpose of the resale of the duplex, that purpose in itself could be considered a dominant factor that would lead to the conclusion that the payment of the compensation was a capital expenditure.
However, in a context where the landlord pays compensation to his tenant because of his obligations under the Civil Code of Québec, this element could then be considered dominant and the compensation could be considered a current expense.
CRA concluded that the “classification of current expenses and capital expenses remains a question of fact” on which it could not provide a definitive response.