Principal Issues: 1. Is the compensation paid by the owner of a dwelling to a tenant in order to vacate the dwelling for the duration of the renovation deductible in full in the year in which it is paid, regardless of the nature of the work carried out? 2. If the owner of the dwelling, rather than paying compensation to the tenant, pays directly to third parties the costs associated with the temporary relocation of the tenant, would the answer be the same?
Position: 1.2. Question of fact.
Reasons: 1.2. In both cases, it is necessary to determine whether the compensation paid to the tenant by the landlord or the payments made to third parties are capital expenditures or current expenditures. The ITA does not define either of these two expressions. However, certain criteria (jurisprudence) are used to make such a determination. They are listed in numbers 1.4 to 1.12 of Income Tax Folio S3-F4-C1. However, no criterion is decisive on its own. These criteria must be considered in relation to each other, and not as separate criteria.
FEDERAL TAX ROUNDTABLE, NOVEMBER 2, 2023
APFF CONFERENCE 2023
7. Compensation paid to temporarily vacate a rental unit
An individual owns a duplex. The individual lives in one of the units and rents the other unit to a third party. The income from the rental of this unit is a source of income to the individual and is declared annually by the individual.
Major work is planned on the rental property, some of it of a capital nature (to improve the existing property) and some of it of a routine nature (due to repairs required as a result of normal use of the property over time).
In order that the housing unit can be vacated for the estimated one-month duration of the work, the landlord pays $5,000 in compensation directly to the tenant, which will be used inter alia to pay for the storage of some of the tenant's furniture, to pay for the move and temporary accommodation for that month, and to compensate the tenant for inconveniences.
Questions for the CRA
(a) Is the compensation paid by the landlord to the tenant deductible in full in the year it is paid, regardless of the nature of the work performed?
(b) Instead of paying compensation to the tenant, if the landlord paid the costs of storage, temporary move and temporary housing directly to third parties, would all of those amounts be deductible in the year in which they are paid, regardless of the nature of the work performed?
CRA response to question 7(a)
For the purposes of this response, we have assumed that the lease entered into between the individual owner ("landlord") and the third party ("tenant") with respect to the housing unit has not been terminated. We have also taken into account the fact that the Civil Code of Quebec[footnote: RLRQ] imposes various obligations on a landlord. Among other things, 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 the tenant will have to incur as a result of the evacuation.
Generally, a taxpayer may deduct in computing rental income expenses incurred to renovate or maintain a housing unit rented to a third party if such expenses are not restricted by the application of, among other things, paragraphs 18(1)(a), 18(1)(b) and 18(1)(h) and section 67. In other words, in this case, the landlord could deduct the compensation it pays to its tenant if the expense was incurred or made for the purpose of earning income, was not a capital expenditure, was reasonable in the circumstances, and did not constitute personal or living expenses.
Consequently, in the situation described, one of the questions that must be answered is whether the compensation paid to the tenant by the landlord is a capital expenditure or, conversely, a current expense. The Income Tax Act does not define either of those terms. However, certain criteria derived from the jurisprudence allow us to distinguish one from the other.
They are listed in paragraphs 1.4 to 1.12 of Income Tax Folio S3-F4-C1 (footnote 2). Among other things, we must consider whether the expenditure was made to create an enduring benefit or whether it was incurred to maintain or improve an asset.
That said, no single criterion is determinative. These criteria must be considered in relation to each other, and not as separate criteria. In essence, consideration of all the facts and circumstances surrounding a particular situation must be taken into account in determining, from a practical and business point of view, what the payments in question were intended to accomplish.
In our view, the nature and context in which the work is carried out are certainly elements to be considered in this case. For example, if 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.
As is evident, we cannot provide a conclusion in a hypothetical situation such as that presented. The character of current expenses and capital expenditures remains a question of fact.
CRA's response to question 7(b)
The preceding comments also apply to this question. As in the answer to question (a), the nature and context of the work carried out are certainly criteria to be considered in determining whether an expense is current or capital in nature.
Oliver Bergeron
November 2, 2023
2022-094217
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 RLRQ.
2 CANADA REVENUE AGENCY, Income Tax Folio S3-F4-C1, "General Discussion of Capital Cost Allowance", February 27, 2019.