Deducting Renovation and Maintenance Expenses

Introduction
Understanding deducting renovation and maintenance expenses is essential for landlords, real estate investors, Airbnb operators, and homeowners renting out part of their property. Renovations are among the most audited areas by CRA and Revenu Québec because taxpayers frequently misclassify expenses or deduct amounts that should be capitalized. The distinction between current repairs (fully deductible now) and capital improvements (deductible over time using CCA) can dramatically change your tax outcome. This guide explains how deducting renovation and maintenance expenses works, the legal rules, common CRA pitfalls, Québec-specific requirements, and how to protect yourself from costly reassessments.

Legal and Regulatory Framework
Deducting renovation and maintenance expenses is governed by:

• the Income Tax Act (ITA)
• CRA Interpretation Bulletins (IT-128R, IT-128R2)
• CRA rental property guidelines
• Excise Tax Act (GST/HST on capital items)
• Revenu Québec Taxation Act
• Québec TP-80 rental reporting requirements
• capital cost allowance (CCA) rules
• principal residence rules for mixed-use properties

The tax treatment depends on:

• the nature of the work
• the purpose of the renovation
• whether the expense improves the property beyond original condition
• whether it extends useful life
• whether the property is rental or personal use

1. Current Repairs vs Capital Improvements (The Core Distinction)

Current Repairs = fully deductible

These expenses restore the property to its original condition.

Examples:

• repairing drywall
• painting walls
• replacing broken light fixtures
• patching a roof leak
• repairing plumbing
• fixing damaged flooring
• replacing small hardware
• routine cleaning and maintenance

These are deductible immediately under deducting renovation and maintenance expenses.

Capital Improvements = must be depreciated (CCA)

These expenses improve the property beyond its original condition.

Examples:

• building a new bathroom
• finishing a basement
• installing new kitchen cabinets
• replacing entire roofing
• adding new flooring to upgrade quality
• installing new windows
• adding a deck or extension
• upgrading electrical system

Capital items must be depreciated over several years.

2. CRA’s Key Tests for Classification

CRA uses several tests to determine whether a renovation is a repair or improvement.

A. Does the work improve the property beyond original condition?

If yes → capital.

B. Does it provide a lasting benefit?

Long-term enhancements → capital.

C. Was the item replaced with a substantially better one?

Higher quality upgrades → capital.

D. Is the work necessary for ongoing maintenance?

Routine, recurring repairs → current expense.

E. Was the renovation part of a larger improvement project?

Grouped renovations → capital.

These tests help categorize deducting renovation and maintenance expenses correctly.

3. Deductible Current Repair Expenses (Examples)

Fully deductible in the year paid:

• minor plumbing repairs
• repainting
• replacing small parts of siding
• repairing cabinets
• fixing a window that cracked
• extermination costs
• furnace repairs (not replacement)
• AC servicing
• driveway patching
• replacing a few shingles
• repairing water damage

As long as the item returns the property to its original condition, it is usually current.

4. Capital Expenses Requiring CCA (Examples)

Capital items must be added to the property’s cost and depreciated:

• full roof replacement
• major plumbing overhaul
• new kitchen installation
• basement finishing
• converting a home to a duplex
• new furnace or AC unit
• installing hardwood flooring
• building additions
• significant landscaping improvements
• structural foundation upgrades

CCA classes:

• Class 1 — 4% (residential building)
• Class 3 — 5% (commercial building)
• Class 8 — 20% (appliances & furniture)

5. Mixed-Use Homes (Dangerous Area)

If you rent out part of your home:

• repair expenses must be allocated between personal and rental use
• capital improvements may affect principal residence exemption (PRE)
• claiming CCA may jeopardize PRE

CRA audits mixed-use repairs aggressively.

6. Airbnb Operators — Special Renovation Rules

Short-term rental operators face unique issues:

• Airbnb activity is considered business, not passive rental
• more renovations may be considered capital
• GST/HST may apply to capital improvements
• decoration and staging costs may be deductible
• ITCs/ITRs may apply for GST/QST registered hosts

Airbnb renovations are a high-risk area for deducting renovation and maintenance expenses.

7. Documentation Requirements

To support renovation deductions, keep:

• detailed invoices (supplier name, GST/QST numbers)
• before/after photos
• contracts and quotes
• proof of payment
• descriptions of work performed
• separate invoices for materials vs labour
• allocation calculations for mixed-use properties
• CCA schedules for capital items

Missing documentation leads to denied deductions.

8. Key Court Decisions

Canadian courts have ruled:

• upgrades that significantly enhance value must be capitalized
• replacing entire systems (roof, plumbing, windows) is capital
• minor repairs remain deductible even if frequent
• expenses grouped with capital projects become capital
• undocumented repairs are denied
• mixed-use properties require strict allocation
• Airbnb operations require business-level documentation

These rulings shape deducting renovation and maintenance expenses nationwide.

9. Why CRA and Revenu Québec Audit Renovations

CRA and ARQ focus on renovation claims because:

• many taxpayers deduct capital upgrades incorrectly
• renovations often involve large dollar amounts
• undocumented contractor invoices are common
• cash payments cause audit flags
• mixed-use homes complicate classification
• substantial renovations may trigger GST/HST
• Airbnb operators often misreport improvements
• large losses without REOP raise suspicion

Renovation audits are one of the most common real estate tax audits in Canada.

Mackisen Strategy

Mackisen CPA provides complete renovation-deduction support:

• classifying repairs vs capital properly
• preparing T776 and TP-80 accurately
• evaluating GST/HST and QST implications
• calculating reasonable allocations for mixed-use homes
• setting up CCA schedules for capital improvements
• reconstructing missing receipts
• preparing audit-proof documentation packages
• defending landlords in CRA/ARQ renovation audits
• guiding Airbnb hosts on renovation rules

We protect clients from costly renovation misclassification penalties.

Real Client Experience

Examples from Mackisen’s renovation cases:

• A landlord deducted a full basement reno as repairs. CRA reclassified it as capital. We appealed and reduced CCA recapture.
• An Airbnb host deducted luxury furniture as repairs. ARQ disallowed the claim. We restructured and recovered partial deductions.
• A duplex owner replaced the entire roof. CRA attempted to deny immediate deduction. We corrected filings as capital and optimized CCA.
• A landlord lost receipts for $18,000 of renovations. We reconstructed invoices through contractors and preserved deductions.
• A Québec investor deducted 100% of renovations on a mixed-use home. ARQ reassessed. We recalculated allocations and reduced tax.

Common Questions

• Are renovations fully deductible?
No—only repairs. Capital items must be depreciated.

• Can I deduct painting?
Yes—usually a repair.

• Is a new roof a repair or capital?
Capital—major structural upgrade.

• Can Airbnb hosts deduct renovations?
Yes, but many are capital and require CCA.

• Do I need receipts?
Yes—CRA denies undocumented expenses.

• Do renovations affect principal residence exemption?
Yes—capital improvements may affect PRE for mixed-use homes.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps landlords, homeowners, and Airbnb operators correctly manage deducting renovation and maintenance expenses. Whether you’re planning renovations, already completed work, or facing a CRA/ARQ audit, our expert team ensures full compliance, maximum deductions and audit-proof documentation.