Can you split reno tax deductions across several years? (Canada)

3 Replies

Hi everyone,

I have a question specifically about claiming expenses (tax deductions) on "major" renovations/repairs for rental properties, specifically in Canada (but perhaps US has a similar system).

As far as I'm aware, in Canada at least, renovations can either be considered as current expenses (ie: tax deductions on your yearly rental income) or capital expenses (ie: tax deductions that are applied only upon the sale of the property).

I am using the following link to distinguish between these two types of renovations.

I plan to perform two major renovations on my rental income property this year (brick wall repair and roof repair). I am considering these as current expenses based on one definition from the above link which states: "an expense that simply restores a property to its original condition is usually a current expense."

However these are very expensive repairs (30k+ in total) and will definitely exceed the rental income for one year. My questions are:

1) What happens when deductible expenses exceed rental income for a particular year from a tax perspective?

2) Can you split the deductible expenses over several years?

Thanks for helping out!

You would probably be better served by retaining the advice from an accountant that is familiar with your particular scenario. Money spent on rental properties can be classified in many different ways. Was the property still "rent-able" when the renovations were taking place? If so, it may be classified as a capital improvement on the property and would not be tax deductible. If these renovations were in fact "repairs" in order for you to re-establish tenancy, then the expenses should be a write off. Canadian tax law well as most countries from my understanding, is vague on purpose (the use of the word "usually"). Be sure to refer to local professional advice first and foremost. Deferring taxes to the next fiscal year is usually a maneuver used by people who make their living in commodities. However, if you incur a loss in year #1 because of expenses necessary to maintain performance on the property, then yes, those losses should theoretically carry over to the next year to help mitigate year #2's gains. Maybe a wash with no gains to pay taxes on at all. Depends so much on strategy and personal scenarios. 

@Vlad Popovici

As Ken indicated, this is territory to consult with an accountant.   In addition to the item you quoted: "an expense that simply restores a property to its original condition is a current expense" there are also a "lasting benefit" (if the repair is to provide benefit over a long period) and "value" criteria (if the repair is a significant portion of the value of the property) which are applied.   

For example, if you recover your replace the shingles on a roof you are restoring the property to its original condition but the roof has a lasting benefit (i.e. it will be twenty years before you need to replace it again).  Ultimately, the CRA will see the new roof as a capital expense - becomes a fixed part of the property and part of the cost basis which you can depreciate over time.

Similarly if you have entire walls re-layed or repointed on a brick building, it would be deemed a capital expense and not a current expense because of the lasting benefit ... if you fixed a small section of brick to repair damage,  you would likely be able to call it a current expense.

As far as expenses exceeding revenues, there are guidelines for the carrying forward and back business expenses - again, sit down with your accountant.