It’s no easy matter to get a handle on the Income Tax Act and its regulations and how the Canada Revenue Agency and the courts will interpret them.
Sometimes the skills of professional tax practitioners might be less important than those of a psychic.
One case in point is the treatment of expenses for repair and maintenance of income-generating property.
In some cases, such expenses will be considered a capital expense, meaning they can be deducted only over time as capital cost allowance. This is obviously less advantageous than current expense treatment, which generally provides for full deductibility in the year the expense is incurred.
Read Also
Crop insurance’s ability to help producers has its limitations
Farmers enrolled in crop insurance can do just as well financially when they have a horrible crop or no crop at all, compared to when they have a below average crop
So, what is the difference between the two?
If a farmer paints his barn for the first time, that apparently is a capital expense that can be amortized only over a number of years. If he repaints it a year later, that is a current expense that can be deducted in full for that year.
The interpretation of the two similar acts is that the first painting is a capital improvement that adds enduring value to the barn. The second and subsequent paintings are merely maintenance, restoring the barn to its original condition, and can be deducted as current expense.
In a recent tax court case, a taxpayer was trying to overturn a CRA assessment regarding repairs he made to a residential rental property. Based on a house inspection report and concerns raised by the tenant, the owner replaced the back deck attached to the house. The deck was 20 years old, parts of it were rotting, and the owner and the tenants were justifiably concerned about its safety.
The owner contracted to have the deck restored to its original condition with the exception of two minor improvements to the stairs and railings. The repairs came in at slightly more than $8,000, including GST. The taxpayer claimed the repair costs as a current expense and deducted the full amount in the year the expenses were paid out.
CRA disagreed. It argued that this was a capital expense that significantly improved the value of the asset; therefore, the expense should be added to the capital cost of the property.
The court took a different view. Although it agreed there is no single test that determines whether an expense should be considered current or capital, there are a number of general principles to a guide a decision.
One such guideline is that the improvement must have a significant value compared to the rest of the property. Adding a new room or heating system or extending the building in a way that would make it a significantly different asset would be examples of substantial changes or improvements to a property.
In this case, the judge found that restoring the deck to its original condition did not constitute such a radical change in the value of the asset.
The judge allowed the taxpayer’s appeal, with costs, and ordered the minister to reassess the amount as a current expense.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
