Renting out a property can not only put income in your pocket but give you a tax advantage, too. On your Canadian income tax return, you’ll be able to write off the expenses of your rental property against your income.
Before you complete Statement of Real Estate Rentals as part of your T1 Income Tax Form, though, you’ll need two things: all your receipts for your expenses and a basic understanding of the two different types of expenses that you might claim as a landlord.
Current vs. Capital Expenses
The easiest way to remember the difference between these two is to distinguish between the duration of their benefits. Current expenses (a.k.a. operating expenses) are recurring expenses that provide a short-term benefit while capital expenses provide a benefit that lasts several years.
Having the gutters cleaned on your rental property or having the exterior painted are examples of possible current expenses you might claim. Replacing a stove, on the other hand, or having new windows put in, are examples of possible capital expenses.
Important Tax Tip: Notice how we keep carefully writing “having” something done? That’s because you can’t deduct the value of your own labour – just other people’s.
The big difference between current and capital expenses tax-wise is in the way you claim them. All of a current expense can be claimed “right now”, so to speak; if it cost you $112 to get your rental property’s gutters cleaned, that’s what you claim.
Capital Expenses & Capital Cost Allowance
The cost of capital expenses, on the other hand, can’t be claimed all at once. Instead, you need to deduct their cost over a period of years as Capital Cost Allowance (CCA), because capital expenses relate to depreciable property, which wears out over the years. So if I bought a new stove for my rental property that cost $2400, I would only be able to deduct part of the cost the first year and would continue to write off the rest of the cost over several years’ worth of income tax returns.
How much would I write off? That depends on the Canada Revenue Agency class of capital allowance a capital item is in. Household appliances fall under Class 8 and have a CCA rate of 20%.
However, because of the half-year-rule, which states that in the year you acquire or make additions to a rental property, you can only claim Capital Cost Allowance on one-half of your net additions in a particular class, I would only be able to claim CCA on half the cost of the stove in the year I had purchased it, or $1200. Then, applying the CCA rate of Class 8, my CCA claim in the first year would be $240. In subsequent years, I would write off the rest of the cost of the stove according to the CCA rules.
You can find details of the different Capital Allowance classes and how to calculate CCA in Chapter 3 of T4036 – Rental Income.
You need to be especially aware of the difference between the two types of expenses when you’re getting ready to sell your rental property. From the Canada Revenue Website: “If you make repairs to your property because you want to sell it, or you make the repairs as a condition of sale, the repairs are capital expenses. However, we consider the repairs to be current expenses if they were necessary and you made them to your property or were making them before you decided to sell”.
How to Tell if It’s a Capital or a Current Expense
Confused as to whether a renovation is a capital or current expense? The Canada Revenue Agency cautions that “an increase in a property’s market value because of an expense is not a major factor in deciding whether the expense is capital or current”. Instead, if you’re having trouble deciding, you should consider the following four questions (which they provide in convenient chart form with explanations here (T4036 – Rental Income).
- Does the expense provide a lasting benefit?
- Does the expense maintain or improve the property?
- Is the expense for a part of a property or for a separate asset?
- What is the value of the expense?
Next: A look at the specific rental property expenses you can and can’t deduct