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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?
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.
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!