Tax Officials Provide Guidelines For Income Tax Treatment of Repairs to Rental Condos
July 16, 2002
Canada Customs and Revenue Agency has recently released a Technical Interpretation regarding the tax treatment of expenditures incurred for remediation work done on the building envelope of a leaky condominium. This will concern you if repairs have been performed on your condominium providing it is being used as a rental property and not as a personal residence.
If you have been claiming capital cost allowance, the expenditure, if it is considered on account of capital, may be deducted over the useful life of the property. On the other, if the expenditure is on account of income then it is deductible as a current expense. A determination of whether it is on account of capital or income can only be made after all of the relevant facts of each particular case have been considered.
In rendering their opinion,CCRA has applied the comments contained in paragraph 4 of anInterpretation Bulletin – IT-128R, Capital Cost Allowance – Depreciable Property, which are to the effect that if the result of the expenditure is to materially improve a property beyond its original condition, such as when a new floor or a new roof is replaced by one that clearly is of better quality and greater durability, then the expenditure is regarded as capital in nature. In CCRA’s view, it is irrelevant whether the market value of the property is increased as a result of the expenditure.
In commenting on the tax deductibility of expenditures relating to remediation work done on the building envelope, CCRA indicates that the test is whether different construction strategies were employed for the exterior walls of the building in order to control rain penetration in a more effective manner. If such work would result in a material improvement to the property beyond its original condition, in CCRA’s view, the cost would be considered a capital expenditure.
However, in circumstances where costs are incurred in respect of repairing damage to the internal components of a building, such as mouldy installation and rotted framing as a result of water penetration, these expenditures could generally be considered currently deductible if the repair restores them to their original condition using identical or equivalent quality material and does not improve them beyond their original condition.
In determining the tax treatment of the expenditures incurred in respect of remediation work, it is therefore incumbent upon the contractor/architect to provide you with an allocation or breakdown as to the costs incurred with respect to the exterior walls and roof of the property to control rain penetration in a more effective manner. These costs will then have to be capitalized. On the other hand, amounts expended to repair the damage to the internal components of the building should be deductible on a current basis. Unfortunately, there is no remedy under the Income Tax Act if the condominium is not used to earn rental income.
If you have incurred expenditures in respect of a condo repair, you should consult with your tax advisors to determine whether any of the expenditures are deductible on a current basis.