Advertisement
Whether to write off the cost of renovations annually, or upon the sale of the property, depends on how you plan to use it. Do you intend to hold it as a source of income, or sell it in short order to take advantage of rising real estate values?
Q. My wife and I own a condo in Ottawa that we rent out. Prior to our tenants moving in we made some improvements, including adding a new furnace, new lights, a gas fireplace and new laminate flooring. I understand we cannot claim these expenses as operating expenses and should claim them as a capital cost, but how do I determine if it is better to claim the capital cost from the rental building against our income this year, or to take a deferred capital cost and reduce our capital gains when we sell it in the future?
–Charles
A. Thank you for this question; it’s one that comes up often for owners of secondary properties.
First, I recommend you maintain a detailed record with relevant invoices and payments for all upgrades and expenditures to your property for as long as you own it. And yes, this means keeping your records for longer than the seven-year requirement. That’s because when you do sell the property and claim capital additions at that point, Canada Revenue Agency (CRA) may ask for proof of the expenditures.
What you’ll need to determine throughout your years of ownership is what constitutes an upgrade versus what can be expensed as repairs and maintenance. I suggest you discuss this with your accountant each year and document your rationale for each decision.
Regarding the issue of taking a capital cost allowance (CCA) on your tax return annually, this depends on a number of factors which you should also discuss with your accountant each year, as your tax strategy will depend on what you plan to do with the rental property. For instance, if your intent is to hold the property for a long time and use the property as a revenue stream, then taking the CCA might make sense as it will reduce your taxes; the property will ultimately be either sold upon your death or passed on to your beneficiaries, but at that time there will be a deemed capital gain to be added to your final return, calculated as follows:
Market Value of the property on the date of death
minus Adjusted Cost Base (ACB) of the property
The ACB is the original cost of the property, plus upgrades, less CCA taken.
If you plan to hold the property for only a short time to take advantage of rising market values, then you would likely want to minimize the taxes on your capital gain and so you would not take the CCA.
Finally, taking CCA or not can be decided on a year-by-year basis as it is a discretionary deduction. In all cases, you will benefit by discussing your short- and long-term plans for the property with your tax accountant.
Theresa Morley, CAP, CA, is a partner with Morley Chartered Accountants in Barrie, Ont. Check out her blog.
Share this article Share on Facebook Share on Twitter Share on Linkedin Share on Reddit Share on Email
Canadians with no children or siblings must consider estate planning alternatives. Here’s why trust companies can be a good...
The federal government’s capital gains inclusion rate increase has yet to become law. There’s a slight chance it may...
Canadians have reporting requirements for foreign assets, income and tax paid. Here’s how to claim each of these on...
A Certified Financial Planner provides perspective on the TFSA vs. RRSP question for a couple in their late 50s...
In retirement, some income is not subject to withholding tax, and you may potentially owe tax after filing each...
Some strategies are time-sensitive, while others can help you start the new year on the right foot.
Sometimes, it’s not action, but inaction, that can hurt you financially. Here are examples of when selling may be...
Wondering whether your estate planner knows the latest tax laws? Do you need a tax lawyer too? Discover three...
Do Canadians need to consolidate RRSP accounts before converting to RRIFs? Find out this and more.
Here’s a primer for Canadians on choosing between employment and self-employment for a new work arrangement.
We have been renting out our property for almost 10 years. The tenants have left and we have decided to move back in. Before we move back in, the place needs some repairs and minor improvements (painting, new kitchen countertop) due to the usual wear and tear. Can I claim these expenses as deductions from this year’s rental income? Or is it too late now that the tenants have moved out?
Thank you and stay safe!
We have been renting out our property for almost 10 years. The tenants have left and we have decided to move back in. Before we move back in, the place needs some repairs and minor improvements (painting, new kitchen countertop) due to the usual wear and tear. Can I claim these expenses as deductions from this year’s rental income? Or is it too late now that the tenants have moved out?
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.