As tax season has come to an end, I often think about the biggest surprises that my clients receive when preparing their personal income tax returns. Many people earn rental revenue but they are sometimes confused by how their taxable income is calculated. They confuse the spending of money with getting a deduction. Not every cash outlay will save you money on your taxes.
This problem arises due to the difference between an expense and an asset.
If you replace one window it is likely an expense and will reduce your taxable income dollar for dollar. If you replace all of the windows in your building this would probably be considered to be a capital item. This means that you add it to the cost of your property and depreciate it at 4% a year, which is pretty much zero! There is plenty of grey area in between these two clear-cut examples. There are literally thousands of court cases where Canada Revenue Agency has taken the position that the amount of money spent on repairs was a capital item and the taxpayer felt it should have been allowed as a deduction.
When you spend money on your rental property you will only get an immediate deduction if what you purchased was an expense. If the amount spent was to buy assets, the deduction is going to be available over time, through depreciation. We understand that when we buy a car or a computer we write that off over time, but the classification is not as clear when we are spending money to repair or renovate rental property.
If you receive rental income spend a little time with your tax preparer to better understand the rules that apply to your tax situation.