Are Building Expenses Deductible?
Many people keep their rental property when they retire. This allows them to deduct certain expenses and accumulate RRSP deduction allowances (until December 31 of the year they turn 71), since their net rental income is reported as income earned.
Generally, some expenses (such as operating expenses) incurred for a rental building or building occupied by a business can be deducted from income calculations or, within certain limits, provide an amortization deduction (as a capital expenditure).
If you use part of the building for personal use, such as in a duplex, expenses related to the area you live in are not deductible. General expenses must be reasonably divided based on, for example, total area or number of rooms.
What Are Operating Expenses?
Operating expenses are fully deductible from gross rental income in the year in which they are incurred. They consist of the following:
- Mortgage interest
- Property tax
- Property insurance premiums
- Heating and electricity
- Maintenance and repairs to maintain the value of the building or restore it to its initial condition
- Space-for-rent ads
- Management, administration, and office expenses
- Vehicle use, under certain conditions
For instance, the cost of repainting walls or replacing wood siding is entirely deductible, as is the cost of replacing certain built-in furnishings such as carpeting. For a business offering accommodation services, the cost of certain additional furnishings like washers, driers, and televisions is also fully deductible.
The value of repairs is not necessarily the determining factor for deductibility. All repair costs remain deductible, even if they represent a substantial portion of the building's total value.
This is notably the case when major expenses are incurred for maintenance and repair work that hasn't been performed on an ongoing basis (for example, reshingling or residing).
In the following cases, the work is considered a capital expenditure and is not deductible:
- When an existing building is purchased and needs work to restore it to good condition
- When repairs are made to prepare a building for sale or as a condition of sale
What Are Capital Expenditures?
The cost of renovating or expanding a building is a capital expenditure if the end result is to considerably improve the building beyond its original condition. Examples include replacing a wood stairway with a cement one or replacing wood siding with a better quality, more durable material.
Capital expenditures generally have to be added to the cost of the building for amortization deduction purposes. Amortizations are calculated according to an annual rate as set out in tax law.
If you acquire other capital assets for rental or business purposes, such as furniture or equipment, you can deduct amortization at the rates in effect. The deduction, however, cannot create or add to a net rental loss.
Adapting Property for People with Disabilities
Existing rental or business properties can be renovated to accommodate people with disabilities, and the cost deducted (not capitalized) in the year it is incurred. This special provision applies to the following renovations:
- Door opening devices
- Indoor and outdoor ramps
- Renovations to a bathroom, elevator, or door to accommodate a wheelchair
The cost of purchasing or installing other devices for people with disabilities is also deductible:
- Position indicators in an elevator, such as Braille panels and audible signals
- Visual fire alarms
- Telephone devices for the hearing impaired
- Software and computer components especially designed for people with disabilities
Moreover, disability renovations to your personal residence for yourself, your spouse, or a dependent count as eligible medical expenses:
- Renovation or adaptation of a building (or additional construction fees) so a disabled person can enter, move around, and carry out regular, everyday activities
- Modifying a driveway to accommodate a bus
The owner of a building that is rented out or used to operate a business (with less than $25 million in assets) must declare labor expenses in their Québec tax return, including the names of the people who carried out the renovations, improvements, maintenance, or repairs on the building or surrounding land. Failure to declare this information entails penalties.
For more information on the tax treatment of rental buildings, Flash Retirement recommends the following Websites: