Ads keep this website free for you.
TaxTips.ca does not research or endorse any product or service appearing in ads on this site.  Before making a major financial decision you  should consult a qualified professional.

Capital or Expense TaxTips.ca
Canadian Tax and
Financial Information
TaxTips.ca Home

What's New

Links & Resources

Site Map

Need an accounting, tax or financial advisor? Look in our Directory.  Use above search box to easily find your topic!   Stay Connected with TaxTips.ca!

Home  ->  Business -> Capital or Expense

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 Taxpage.com 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.

TaxTips.ca 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: September 20, 2024

 

Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved.  See Reproduction of information from TaxTips.ca

Facebook  | Twitter  |  See What’s New, stay connected with TaxTips.ca by RSS or Email
The information on this site is not intended to be a substitute for professional advice.  Each person's situation differs, and a professional advisor can assist you in using the information on this web site to your best advantage. 
Please see our legal disclaimer regarding the use of information on our site, and our Privacy Policy regarding information that may be collected from visitors to our site.