22 August 2011 External T.I. 2011-0414561E5 - Capital or Current Expense

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 expenditures incurred by a taxpayer for a rental property would be a capital or current expense.

Position: General comments

Reasons: Question of fact

XXXXXXXXXX
                                                      2011-041456
                                                      Charles Rafuse
                                                      613-247-9237

August 22, 2011

Dear XXXXXXXXXX :

Re: Capital or Current Expense

This is in response to your letter of April 15, 2011, wherein you requested our opinion with respect to whether expenditures incurred for a rental home would be a capital or current expense.

You have indicated that you own a rental property and have incurred expenses in re-roofing the house, replacing a water heater, two existing furnaces and two overhead garage doors. You have also indicated that none of the expenditures resulted in an upgrade and asked if these costs should be treated as capital or current expenditures.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to make the general comments set out below, which may be of assistance.

There are no fixed rules when determining whether an expenditure is on account of income or on account of capital. The courts often look to what, from a practical and business perspective was the purpose of the expenditure. The jurisprudence suggests a number of guidelines that may be relevant, but also suggests that no one guideline is determinative. The main four guidelines that the courts have identified as being relevant to the determination are "enduring benefit", "maintenance or betterment", "integral part or separate asset" and "relative value". These guidelines, along with some others, are explained in the Canada Revenue Agency's (the "CRA") Interpretation Bulletin IT-128R, Capital Cost Allowance - Depreciable Property, at paragraph 4.

Of particular importance to your situation may be the guideline in paragraph 4(b) of IT-128R, which gives the example of a roof and provides a discussion on whether the expenditure involves maintenance or betterment. If a new roof clearly is of better quality and greater durability than the replaced roof, then the expenditure would generally be regarded as capital in nature. On the other hand, if an expenditure only restores the roof to its original condition using identical or equivalent quality materials, this would be an indication that it is current in nature.

We have not been provided with sufficient information to comment on whether the expenditures referred to in your letter would be current or capital in nature. However, we would note that you have indicated that the expenditures did not result in an upgrade to the building which leaves the impression that the new roof, furnace, water heater and garage doors would not be betterments, which may be an indication that expenditures relating to the new roof are current in nature.

A component part that ordinarily goes with the building when it is sold or that relates to the use and function of the building such as electric wiring, sprinkler system, air-conditioning equipment, lighting fixtures is included in the building class. Accordingly, the costs of a roof, water heater, furnaces and garage doors, if they are considered to be capital in nature, are included in the same class as the building to which it is attached, generally Class 1, 3 or 6, depending on the type of the building and the date of acquisition. For more information on the classification of buildings, please refer to Interpretation Bulletin IT-79R3, Capital Cost Allowance - Building or Other Structures.

The above mentioned publications are available on the CRA website at www.cra-rc.gc.ca.

We trust that these comments will be of assistance.

Yours truly

S. Parnanzone
Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch