One of my newer clients came to be after being chosen by CRA for an audit. He was previously with a large accounting firm and under the illusion that this offered him some peace of mind and protection as well as guidance. Unfortunately, paying more with a larger firm does not audit proof you at all. As a matter of fact, smaller bookkeepers and firms value your business more and as such will offer you guidance and advice to keep you out of the magnifying glass of CRA more often than larger firms.
My client's issue, as an owner of a rental property, was Capital versus Current expenses in the eyes of CRA. So how is a building owner supposed to know what to expense as a current expense and what to capitalize under a depreciation schedule? CCA has written another helpful guide (notice that comment dripping in sarcasm?) to show you how to figure it out. Current Expenses A current expense is one that generally reoccurs after a short period. For example, the cost of painting the exterior of a wooden property is a current expense. Capital Expenses A capital expense generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden property is a capital expense. Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses. However, an increase in a property's market value because of an expense is not a major factor in deciding whether the expense is capital or current. To decide whether an amount is a current expense or a capital expense, consider your answers to the questions in the following chart. Criteria for determining if a capital expense or a current expense Does the expense provide a lasting benefit? A Capital expense would be: a lasting benefit or advantage. For example, putting vinyl siding on the exterior walls of a wooden property A Current Expense would be: reoccur after a short period of time. For example, painting the exterior of a wooden house. Does the expense maintain or improve the property.Generally, they repair and improve a property beyond its original condition. For example, if you replace wooden steps with concrete steps 1 .Generally, they restore a property to its original condition. For example, repairing wooden steps. Is the expense for a part of the property or for a separate asset? A Capital Expense would be a new dryer in the laundry room. It's not attached to the building and improves the income source. A Current Expense is replacing the wiring in the laundry room. It's attached to the building and is only replacing the existing.....now a new panel is a whole new story-That's a Capital Expense. What is the value of the expense? Here comes the Grey Area from CRA! A Capital Expense could be a roof repair if the proportion of the expense is very high in comparison to a new roof. (IE: $14,000 on a roof repair vs $40,000 on a new roof) A Current Expense could be the same roof repair if the amount spent is low in comparison to a new roof. (IE: $4,000 on a roof repair vs $40,000 on a new roof) and just when you thought you had it all figured out and were allotting expenses into the proper categories.....then came the special circumstances. So you bought an old building, and are renovating it so it's rent worthy? All those expenses which are current expenses - they just became Capital Expenses! The moral of the story is have a knowledgeable accountant and bookkeeper in your corner that has experience with CCA and rental properties. It could be the difference between a clean audit and a reassessment! |
Michelle GibsonAfter over 30 years in business management roles, I want to help other businesses grow and succeed. If I can keep one small business from making common mistakes, I will have helped them immensely! Archives
October 2021
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