5 January 2005 External T.I. 2004-0103451E5 - Current Expense or Capital Improvements

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether renovations to a rental property are deductible in the current year or added to the capital cost of the property.

Position: Question of fact.

Reasons: Applying the criteria set out in IT-128R to the renovation expenditures will determine whether they are currently deductible or added to the capital cost of the property.

A. Seidel
XXXXXXXXXX (613) 957-2058
2004-010345
January 5, 2005

Dear XXXXXXXXXX:

Re: Rental Property Improvements - Current Expense or Capital

We are writing in response to your letter dated November 8, 2004, wherein you requested our comments as to whether the construction costs incurred in respect of a rental property would be deductible as "repairs" in the year incurred or whether such costs should be capitalized as part of the cost of capital property.

The particular circumstances in your letter on which you have asked for our views relate to completed transactions. As discussed in our telephone conversation (John Oulton/XXXXXXXXXX), completed transactions are reviewed by the local tax services office, which you have already contacted. Nevertheless, the following general comments may be of assistance.

When a taxpayer incurs expenses related to a capital property, such expenses are capital expenditures when the property is improved as a result of the expenditure and are current expenses when such expenditures are in respect of the maintenance or repair of the property. Although the Act does not define what constitutes a capital expenditure or a repair of a current nature, the Canada Revenue Agency (the "CRA") has outlined the factors, based on relevant case law, that should generally be considered when determining whether an expenditure is capital in nature or currently deductible in paragraph 4 of Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property ("IT-128R").

Of particular importance to your situation may be the guideline in paragraph 4(b) of IT-128R, which provides a discussion on whether an expenditure is considered to be maintenance, restoring a capital property to its original condition, or a betterment, materially improving a capital property beyond its original condition. In addition, it is mentioned in paragraph 4(b) of IT-128R that where an expenditure includes both current and capital elements, and these can be identified, an appropriate allocation of the expenditures is necessary. Where only a minor part of the expenditures is of a capital nature, the CRA is prepared to treat the whole as being of a current nature.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch