In the exciting world of taxation and accounting there are decisions that we find riveting. Casual observers of this world may not be as interested – but – let me tell you anyway.
I am sure that whenever you spend money you ask yourself, is this an expense or an asset? Accountants spend time deciding if every expenditure is a capital item, which means that it will be added to the amount of assets you have and increase the equity on your balance sheet or, is it an expense and that will reduce your income and therefore your taxes payable?
Business owners would like to have it both ways. Show their banker lots of assets but show the taxation authorities less income. So there are rules, interpretations and court cases. For example, if you replace a broken window, that is an expense. If you replace all of the windows in a building that is very likely a capital item so it will be added to the buildings cost on your balance sheet.
Currently CRA is sending letters to business owners asking for details about their repairs and maintenance expenses. What they are looking for, of course, is large expenditures that the business owner thinks are repairs and CRA might like to show as capital. The difference is significant. If you have an expense you get a full deduction for that amount. If you have a capital item then you have to add that to the cost of your building and write it off at 4% a year, which is pretty close to nothing. So, maybe it is just not accountants who care about this decision. Maybe business owners can work up some enthusiasm for the, is it capital or expense decision?