Every dollar a landlord spends on a rental property falls into one of two buckets. A current expense is deducted in full in the year it's incurred. A capital expense is added to the cost of the property or of a separate asset, and deducted gradually over several years through capital cost allowance (CCA). Getting the bucket right matters: claim a capital item as a repair and you may face a reassessment; treat a repair as capital and you defer a deduction you were entitled to now.
The questions CRA asks
CRA's rental income guide (T4036) doesn't give a single rule. It gives a set of questions, and the answer comes from weighing them together.
| Question | Points to capital | Points to current |
|---|---|---|
| Does it provide a lasting benefit? | Yes, a benefit that lasts years | No, it recurs regularly |
| Does it maintain or improve the property? | Improves it beyond its original condition | Restores it to its original condition |
| Is it for part of the property, or a separate asset? | A separate asset, such as an appliance | Repairing a part, such as a section of roof |
| What's its value relative to the property? | Large relative to the property's value | Small relative to the property's value |
| Was it to get a newly bought property ready to rent, or ready to sell? | Yes | No; ongoing upkeep of a rented property |
CRA notes that the value test is used only when the other questions don't settle it. The improvement question usually carries the most weight: CRA's guide says an expense that simply restores a property to its original condition is usually a current expense.
Common examples
| Expense | Usually | Why |
|---|---|---|
| Repairing a damaged section of roof with similar materials | Current | Restores the original condition |
| Repainting interior walls | Current | Maintenance; CRA treats painting as a current expense |
| Replacing wood siding with vinyl siding | Capital | CRA's example: an improvement over the original |
| Buying a refrigerator for the unit | Capital | A separate asset; furniture and appliances are generally class 8 |
| Repairs to a used property you just bought, to make it fit to rent | Capital | CRA treats these as part of the cost of acquiring the property |
| Landscaping | Deductible in the year paid | A specific rule in CRA's guide, even under the accrual method |
| Pens, stamps and stationery | Current (office) | Small supplies |
| A filing cabinet or desk | Capital | CRA excludes capital purchases from office expenses |
| Mortgage application, appraisal and legal fees for the loan | Deducted over five years | CRA's rule for financing fees |
| Land transfer tax on purchase | Not deductible | Part of the cost of the property |
The grey areas
- Like-for-like replacement of a component. Replacing a worn section of flooring with similar flooring is more likely current; replacing all the flooring with a much better product is more likely capital.
- Mixed invoices. A contractor who repairs water damage and also upgrades the bathroom should itemize the invoice so the repair and the upgrade can be treated separately.
- Work done right after buying. Even ordinary-looking repairs can be capital if they were needed to make the property rentable when you bought it.
Good documentation helps in every grey area: photos of the condition before the work, the quote describing the scope, and an itemized invoice. If CRA ever asks, the question is what the work did, and the photos answer it.
What to keep for a large job
- Photos of the condition before work started.
- The quote or scope of work, showing what was being repaired and what, if anything, was upgraded.
- The itemized invoice and proof of payment.
- Photos of the finished work.
Capital cost allowance basics
Capital expenses are deducted over time through CCA. Each type of property belongs to a class with its own rate, and the claim is calculated on the declining balance of the class.
- Class 1 (4%) includes most buildings acquired after 1987, including their components such as wiring, plumbing and heating.
- Class 8 (20%) includes furniture, appliances and tools costing $500 or more, among other property not in another class.
- Land is not depreciable. When you buy a property, the purchase price is split between land and building, and only the building goes into a CCA class.
- CCA can't create or increase a rental loss. CRA's guide is explicit on this point.
- You don't have to claim the maximum. You can claim anything from zero to the maximum in a year, leaving a higher balance for future years.
- First-year rules have changed. The traditional half-year rule limits the first-year claim, but accelerated investment incentives have changed the first-year amount for property acquired in recent years, and CRA's guide notes a reaccelerated incentive for property acquired after 2024. Your accountant will apply the rule for your acquisition date.
- Selling can trigger recapture. If you sell for more than the remaining undepreciated balance, some past CCA may be added back to income. A terminal loss may be available in the opposite case.
A simple illustration: a building portion of $300,000 in class 1 has a maximum full-year CCA of $12,000 at 4%, before applying any first-year rule. Whether claiming it makes sense depends on your income, the loss restriction and your plans for the property, which is a conversation for your accountant.
Keeping capital items separate as you go
The simplest habit is to flag possible capital items when the invoice arrives, not at year-end. In Propvara, an expense can be recorded as capital so it's kept out of the operating total for your accountant to depreciate, and repair cases keep the before and after photos and quotes that show what the work actually did.
Sources
This article is general information for Canadian landlords and managers, not legal, tax or financial advice. Rules vary by province and change over time.