Current expense versus capital expenditure

A buyer or seller meets this distinction when repair, renovation and equipment costs sit in the financial statements and the question is whether they were deducted at once or belong in an asset class. The CRA’s folio says the Act and Regulations do not define what a capital expenditure is, so it applies guidelines.

How the CRA tests it

The folio says an expenditure will normally be considered capital in nature if it brings into existence an asset or advantage that has an enduring benefit. Its examples: replacing a building’s wood siding with vinyl is likely capital because it is substantially different and has an enduring benefit, while periodically repainting is likely a current expense. Where only a minor part is capital, the CRA’s practice is to treat the whole as a current expense.

What to ask

• Which large repairs or improvements were deducted in recent years
• Whether any of them improved the property beyond its original condition
• How capital cost allowance was claimed on costs treated as capital

For the asset side of a deal, see why buyers prefer asset purchases for tax reasons.