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Capital or Expense

Everyone in business, or with a rental property, is faced at some point with the decision as to whether an expense is capital or current in nature - in other words, whether the cost should be capitalized or expensed.  There are general guidelines that can be followed to determine the answer, but these guidelines don't always fit the situation.

Current expense:
bulletrecurring expense for the replacement, maintenance or renewal of a specific item;
bulletuseful life of the item purchased is relatively short, generally one year or less; or
bulletthe cost of repairs simply maintains or restores an asset to its original condition
bulletthe asset has the same functionality after the work as before the work
bulletthe work does not increase the profitability of the asset

Capital expenditure:

bulleta separate asset has been acquired, and the item purchased provides a lasting or enduring benefit, generally having a useful life of more than one year
bulleta repair cost incurred improves or enhances the original asset beyond its original condition
bulleta repair cost is incurred to repair used property acquired, in order to make the property suitable for use

Capital vs Expense Court Cases

An excellent example of the capital vs expense conundrum was decided by the Tax Court of Canada in Aon Inc. v. The Queen, 2017 TCC 166, with the decision of the court allowing the re-roofing cost of over $4 million as an expense.  See the Video Tax News analysis of this decision.

Repairs And Maintenance Costs in Real estate Rental Business: Canadian Tax Lawyer Guide from discusses court cases where, contrary to CRA guidelines, the costs incurred were found by the court to be repair expenditures, not capital expenditures.

From vLex Canada re Gold Bar Developments Ltd. v. MNR (1987), "The court stated that what was done by the taxpayer was "neither more nor less than was required to replace the deteriorating and dangerous brick condition", nor was it a "voluntary expenditure with a view to bringing into existence a new capital asset for the purpose of producing income, or for the purpose of creating an improved building to produce greater income"."

Mixed Business and Personal Use of Property

Items that can be expensed but are used partly for business use and partly for personal use would be expensed according to the percentage of business use.  Capital items that are also used partly for personal use would be capitalized at 100% of the cost, and depreciation would be determined each year based on the % of business use.  See, in CRA's guide T4002, Personal use of property under "Special situations" in Chapter 4. Articles

Business Expenses - What expenses can I write off against my business income?

Capital Cost Allowance

What expenses can be deducted from property rental income?

Canada Revenue Agency (CRA) Resources

Current or capital expenses

T4002 Self-employed Business, Professional, Commission, Farming and Fishing Income Guide

Business Expenses, with links to more information on each type of expense

Revised: October 26, 2023


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