Hello !
a client has a rental property. he replaced the bathroom for 29k$. he wanted to expense it but I am recommending to capitalize it b/c it’s a big amount and the new bathroom add more time to the usage of the house.
what do you think ?
When in doubt, bring out the scales and weigh it against current legislation and CRA’s guides which help the average user understand the legislation. This CRA guide should be helpful:
Current expenses or capital expenses - Canada.ca
It sounds to me like this is a capital expenditure and should be applied as Outlays and Expenses when the property is sold.
2 Likes
thank you ! I will definitely take a look the CRA guidance. the client did provide me with more information regarding the repairs : “replacing Kitchen tiles, water damage repair in 3 rooms, a shower to replace the one that was damaged and caused the leaks.”
You would need to know if the repairs and replacements restored it to what they originally had, or did they upgrade it when they repaired it. Once you know that, you’ll have a better idea if it’s repairs & maintenance or a capital upgrade.
3 Likes
As @AlbertaEFileT identified…the standard of what was done is important…the primary question remains unanswered here: why was the bathroom renovated/repaired?
The fact that it’s a “big amount” is not relevant. The reason for the reno IS.
eg if the client just didn’t like the look of the room and reno’d it…capital. But, if the fixtures were old, and had been repaired frequently and were threatening (or had caused) damage…that is a VERY different story. Like expense…at least to the extent of the replacement of existing facilities. Any improvements beyond that would be capital (ie added slate to the shower).
2 Likes
It’s true that the dollar amount doesn’t matter per se. But the “why” doesn’t matter either. Only the result matters.
It doesn’t matter if the fixtures are old - it matters whether the property is improved compared to when the taxpayer acquired it. If you buy a property with old, beat-up fixtures, and tear them all out and put in new ones, that’s a capital improvement. Even if the fixtures were unusable as they are when you buy it, it’s a capital improvement.
The reasoning behind this is simple. Compare two situations involving the acquisition of a property with old fixtures that need to be replaced. If the buyer asks the seller to replace the fixtures in exchange for a correspondingly higher purchase price, the full amount will be on account of capital. If instead you buy the property as-is, and then replace the fixtures yourself, the full amount must still be on account of capital otherwise you would gain a tax advantage over the first situation.
So the intent does not matter. You need to compare the state of the property to when the taxpayer first acquired it. This very often involves some judgment, and sometimes it will be partly capital and partly repairs.
2 Likes
The fact that the expenditure has to do with water damage suggests that it is more likely to be repairs than an improvement. It can be both, of course. If the property sustains damage but the own takes the opportunity to upgrade the fixtures instead of simply replacing them, the cost would likley be partly on account of income and partly on account of capital.
1 Like
I’ll agree with that…and disagree too. 
Care must needs be taken!
Stipulated that improving the overall quality of an asset is on capital account. However…doing so on acquisition removes the “repair” option…but doing the same “repair” some time (let’s say a year) later…may well beg the question of “why?”.
“Because I wanted to” is unlikely to float as a repair (nothwithstanding that most landlords are unlikely to be quite that stupid in responding!!). The purpose test remains. See Dicaita 2021 TCC 5 where the taxpayer was successful. It’s quite illustrative of the thinking though. I’m pretty sure there are opposite ones floating around too. Meets the purpose test in the Court’s view - see Para 29.
2 Likes
I find it very difficult sometimes, to do taxes for personal clients. We are not supposed to make decisions for them, we are to inform them of different issues that could raised, so they can make informed decisions. But they always choose the one with the lowest tax consequence, and tried to justied with their reasoning with us. It’s not us that they need to convince, it’s the CRA. I did one last year, with substantial repair as well, told them the expense way too much, resulting in rental loss. CRA would not allowed it, capital expenditure, came back and reassessed the return.
It is not the amount of the repairs that would disqualify them, there is no restriction on genuine rental losses. If the repairs are the result of wear and tear and/or damage resulting from the property being rented, they are legitimately expensed. If the work is something that increases that is an “improvement” then it is capital and can be added to the capital cost of the property, which if it is a principle residence has no cost impact.
I ask them enough questions for them to make a decision about what the costs are that I usually feel comfortable that the return is good.
1 Like
very truth, but when you asked question like, wouldn’t the first thing you do if you found damages, to claim insurance? And get appraisal of damages and claim them against security deposit? Those would be great evidences instead of reasoning with us.
Depends. Not all people maintain flood / water damage insurance and if it isn’t the tenant’s fault, can’t be claimed against a damage or security deposit.
In flood prone areas, many people cannot afford flood insurance and many can’t obtain flood insurance, period. And flooding can cause considerable damage. If a basement unit or units were basically destroyed as is often the case, costs run up quickly. Providing proof of what the damages were, such as pictures while flooded should be sufficient to convince CRA that it is indeed repairs.
I’ve discussed this type of situation with a tax lawyer, and apparently it is a very grey area. The ITA doesn’t pin it down one way or the other, and in tax court the taxpayer often is allowed to expense the majority of it (despite CRA’s policy and guidelines).
It is very much a grey area. It all comes down to it being a question of fact, meaning the specific facts of the specific case are what determines whether it is improvement or repair, or some of both.
2 Likes
It should be capitalized…however, should they choose to capitalize, you would have to consider their intention to sell the property in the future. Is it better not to capitalize and increase the cost of the property thereby decrease the Capital Gain or Recapture Capital Cost?
A deduction is generally better than capitalization. Decreasing a capital gain means essentially deducting 50% of the reno cost at the time of sale. Decreasing rental income means deducting 100% of the reno cost in the year of the reno. You get both absolute tax savings and time value savings.
How do you guys justified situation like this? This is exactly the situation that wears me down. A lot of the responses I see, from the client’s stand point, which are legit sometimes, but CRA could care less. Just accept the clients’ information and go ahead or refuse the return? I have turned down a lot of clients like that, I guess that’s why I couldn’t grow my practice. There must be a reason why they looked for a different accountant too
1 Like
I would not turn down the client for this. As @iain.fyffe said, it is a statement of fact. Depends entirely on the particular situation as to how you should deal with it.
1 Like