Taxpayer purchased fixer-upper rental property in 2021 - renos to get property to “rentable condition” went till late 2023. Still no tenants at this point but available to be rented out.
Note: The taxpayer’s other rental property is currently running a profit.
“In terms of the carrying cost, i.e. property taxes, utilities, insurance and mortgage interest incurred during the period the renovation is conducted, they are also added to the cost of the building and claimed against the future sale of property.”
Previously, I’ve claimed carrying costs of a rented-out property as expenses on the T776. The article says expenses (carry costs) during reno should be capitalized.
Are others capitalizing carrying costs during major renovations while the property is vacant?
CRA publishes helpful easy-to-read guides in plain language (unlike the more technical legal wording of the income tax act)
(They have guides for just about everything)
Guide T4036 (Rental Income) is the one that covers your rental situation.
My immediate reaction: renovating a property THAT IS ALREADY INCOME-PRODUCING is decidedly different in scope and fact from purchasing a property, renovating it and THEN renting it, if I understand the situation correctly.
IMO, all reno costs would be capital, and not on income account, and costs of ownership would NOT (IMO) constitue “rental costs”. The property (and I’m assuming, based on your info as given) was NOT “available for rent” prior to or during the renovation phase. As such, there appears to be no established “source of income” from which to deduct expenses.
And a word of warning: plain-language guides, opinions (ours, too!) etc - whether published by CRA or not, are good “indicators” but they are NOT definitive, nor are they law. You can search CanLII or your favourite tax reference for cases…and they ARE law.
Carrying costs during the renovation portion when the property is unavailable for occupancy, are to be considered ‘soft’ costs and are added to the ACB of the property and can then be used for depreciation.
Once the property is available for rent/occupancy, regardless of whether or not it is actually occupied, then the carrying costs can be added to operating costs that can create a loss in the applicable reporting period. That loss can offset profits from the client’s other properties.
The CRA guides are published for readability of the general public and other novices, and can contain over-simplifications, but they do have a huge advantage over general internet postings and forum opinions - and that is, you know for sure who the publisher is
Note that CRA contradicts themselves on a regular basis though. The only time that CRA issues an opinion subject to Estoppel is when it is a formal ruling and is carried out EXACTLY as specified in the ruling. Otherwise they can assess (and do) in any manner they wish, including contrarily to published administrative practice.
There is a difference between renovations and repairs and maintenance. Repairs that are due to wear and tear as a result of earning rental income are fully deductible. If it is a “renovation” that increases the value of the home it would be capital in nature, and as previously mentioned in this post anything that is spent to prepare the building to be rented would also be a capital cost.
