Check with accountant to ensure you’re tax safe
Q: In the earlier part of 2006, I purchased a rental property. The home was quickly rented. However, last summer we had some heavy days of rainfall and the roof leaked terribly. I had to reshingle and replace much of the entire roof and repair the ceiling and floors due to water damage. It also cost me more than $1,500 for a new fridge and stove. I have an individual that prepares my income taxes that has advised me these are capital items and I could not deduct them for my 2006 income taxes.
A: Real-estate rental deductions are always contentious and Revenue Canada frowns on expenditures that should be capitalized as opposed to being expensed immediately. As an accountant that deals with real-estate investors on a regular basis these issues are frequently asked and dealt with. The income tax act gives specific guideline to help differentiate capital items from current expenses.
•Capital expenditures: Generally, these are expenditures that will provide benefits to taxpayers and a useful life for several years such as appliances, buildings and furniture. Capital expenditures must be capitalized for tax purposes and taxpayers may deduct capital cost allowance to reduce rental income.
An expenditure that may not always be clear to differentiate is repairs and improvements to an older property. Expenditures can be deducted if the repairs were to restore the property to its original condition such as painting, repairing damaged walls, replacing roof shingles with identical or similar tiles. Expenditures cannot be deducted and must be capitalized when repairs improve or better a property beyond its original condition such as replacing external housing bricks with stone, upgrading shingle roofing tiles with Marley tiles, or renovating an unfinished basement.
Based on your information, the repairs can be deducted but the appliances must be capitalized. There are other conditions that repairs cannot be deducted but capitalized. See your accountant to help determine for specific situations.
Q: My youngest son is 26 years old and lives with my husband and me. He gives us $200 every month for household expenses. Must I report this on my tax return and can I deduct expenses? I do not want to do anything illegal.
A: This lifestyle arrangement is more the norm than the exception, particularly with the high cost of real estate in Toronto. Modest amounts received from relatives for covering the upkeep of the home or groceries do not have to be reported on your tax return. Therefore, expenses cannot be deducted because your intent is not for earning a profit.
Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA.
He can be reached at: 416-590-1728 Ext.304
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