Capital Improvements or write offs

[Chris A.]

Hello everyone. This summer I did a BRRRR in Ontario and I'm wondering what I should do regarding claiming the renovation costs. I purchased the property at the start of July and renovated it until Oct 15th. In this period I spent about $50,000 between the labour and material.

Can I claim this 50k as write offs or do I have to add this as a capital improvement? The main issue is that the 50k renovation increased the home value by 245,000 so that 50k in write offs would save me a lot more money.

Any advice would be greatly appreciated.

[Ken Halef]

Hi @Chris Arsenault @Tyler Stiller @Kash Jawed Seen the discussion here and thought I would jump in to confirm what looks like everyone already seems to know. I'm a CPA based in ottawa and what I typically tell my clients is the following to illustrate what is an expense vs capital in natur. See below.

Items to expense would include the following :

1. >Costs to restore an asset to its original working condition (i.e stove repair);
2. >Reoccurring items (i.e. replacement of filters, lightbulbs, etc.);
3. >Useful life of the asset purchased is short or not material (high in cost) such as a showerhead

Items that warrant capitalization are :

1. >Assets that have a long useful life (1yr<). Some examples include refrigerator, fireplace, balcony and so on.
2. >Incurred costs to bring a property/asset to a condition suitable for use. Common example is costs incurred upon acquisition of a property most commonly renovation costs.
3. >Costs that enhance the life of an asset beyond its original useful life such as paving, kitchen reno's, flooring replacement, etc.

Hope this adds some clarity.

[Tyler Stiller]

CRA says if it’s capital expenditure then you add it as that. But if it is something that won’t last too long, for example painting that can be an expense for this year and a write off this year. Fixing drywall, it’s a repair, not a capital expense. 

I think it’s better tax wise to go ahead and do expense as much as possible this year, so to break out the costs per job. 

[Kash Jawed]

You shouldn't double dip. From consulting my accountant - You cannot expense your Capex in most cases. You are increasing value of your house and receive a long lasting benefit.

I suggest talking to an accountant and refer to this chart by CRA https://www.canada.ca/en/reven... 

[Tyler Stiller]

@Kash Jawed

Agreed. No double dipping. When I did my BRRRR this year, I got the contractor to Bill it broken up by job. For example drywall repair, fireplace repair, painting.

Then on another line the flooring, and kitchen etc.

[Kash Jawed]

@Tyler Stiller yes - that makes sense. However how did your accountant handle this since you did a BRRR. These improvements listed would have still contributed towards your appraised value.

[Tyler Stiller]

@Kash Jawed

They were ok with it as long as it was a repair and not an improvement. Even if this example I fixed up the stove since it was broken it was a repair and not a capital expense.

So on my profit loss for the rentals, they either go to an expense in this year or a capital expense.

[Ken Halef]

Hi @Chris Arsenault @Tyler Stiller @Kash Jawed Seen the discussion here and thought I would jump in to confirm what looks like everyone already seems to know. I'm a CPA based in ottawa and what I typically tell my clients is the following to illustrate what is an expense vs capital in natur. See below.

Items to expense would include the following :

1. >Costs to restore an asset to its original working condition (i.e stove repair);
2. >Reoccurring items (i.e. replacement of filters, lightbulbs, etc.);
3. >Useful life of the asset purchased is short or not material (high in cost) such as a showerhead

Items that warrant capitalization are :

1. >Assets that have a long useful life (1yr<). Some examples include refrigerator, fireplace, balcony and so on.
2. >Incurred costs to bring a property/asset to a condition suitable for use. Common example is costs incurred upon acquisition of a property most commonly renovation costs.
3. >Costs that enhance the life of an asset beyond its original useful life such as paving, kitchen reno's, flooring replacement, etc.

Hope this adds some clarity.

[Account Closed]

@Ken Halef

What Ken said. Lasting benefit (including increasing property value) = capitalize. Repair from tenant damage or no lasting benefit = expense.