Repairs vs. Replacements: How the CRA Looks at Rental Property Expenses
January 2026
One of the most common — and costly — mistakes rental property owners make is misunderstanding the difference between a repair and a capital improvement for tax purposes.
The distinction matters because it determines when and how an expense can be deducted, and whether it reduces taxes this year or only gradually over time.
The Canada Revenue Agency (CRA) is very clear on this issue, and misclassification can lead to reassessments, denied deductions, penalties, and interest.
This article explains:
What the CRA considers a repair
What constitutes a replacement or betterment
What can be deducted in full
What must be capitalized and depreciated
Practical examples specific to residential rental properties
Repairs: Fully Deductible in the Year Incurred
A repair is an expense that restores a property to its original condition without improving it beyond what it previously was.
If the work:
Fixes wear and tear
Maintains the property in a rentable condition
Does not extend the useful life of the asset
Does not materially improve value or functionality
…it is generally considered a current expense, deductible in full in the year it is incurred.
Common Examples of Fully Deductible Repairs
Fixing a leaking faucet or pipe
Repairing drywall or patching holes
Replacing broken tiles with similar tiles
Painting between tenants (same or comparable quality)
Repairing an existing furnace or hot water tank
Electrical or plumbing repairs that restore function
These expenses are considered part of the ongoing cost of earning rental income, and the CRA allows them to be written off immediately.
Replacements & Betterments: Capital Expenses
A replacement or betterment occurs when work:
Improves the property beyond its original condition
Extends the useful life of an asset
Enhances value, efficiency, or functionality
Replaces a major component or system
These costs are not deductible in full in the year incurred. Instead, they must be capitalized and written off gradually through Capital Cost Allowance (CCA).
What the CRA Means by “Betterment”
The CRA uses the term betterment to describe improvements that make the property:
Better than it was when acquired, or
Better than it was previously maintained
Even if the work feels “necessary,” it may still be considered capital if it upgrades or modernizes the property.
Common Capital (Non-Deductible) Examples
Replacing a furnace with a higher-efficiency system
Installing new windows where old ones were repaired previously
Replacing an entire roof (not just repairing shingles)
Full kitchen or bathroom renovations
Upgrading flooring throughout a unit
Adding air conditioning where none existed
Structural changes or layout reconfiguration
These costs must be added to the capital cost of the property and depreciated over time, often over many years.
The “Repair vs. Replacement” Grey Zone
Many expenses fall into a grey area. The CRA looks at context, not just the invoice.
Key questions the CRA asks:
Was the work done to restore or improve?
Did it replace a small part or a major component?
Was the work recurring maintenance or a one-time upgrade?
Did it significantly extend the asset’s useful life?
Example: Flooring
Replacing a few damaged boards → Repair
Replacing all flooring in the unit → Capital improvement
Example: Roof
Repairing localized damage → Repair
Replacing the entire roof membrane → Capital
Special Note: Initial Repairs After Purchase
If repairs are required immediately after acquiring a property, the CRA may treat them as capital expenses, even if the work looks like a repair.
Why?
Because the cost may be viewed as part of the purchase price, necessary to make the property rentable.
Example:
Buying a property at a discount because it needs work
Completing repairs before the first tenant moves in
In these cases, the CRA often requires capitalization.
What This Means for Rental Property Owners
From a tax-planning perspective:
Repairs reduce taxable income immediately
Capital expenses reduce taxable income slowly over time
Neither is “good” or “bad” — but misclassifying them can be expensive.
Good documentation matters:
Detailed invoices
Clear descriptions of work performed
Before-and-after context
Separation of repair vs. improvement costs when possible
Final Thought
If there’s one takeaway, it’s this:
Just because something is “maintenance” in practice doesn’t mean it’s a “repair” for tax purposes.
Understanding how the CRA distinguishes repairs from betterments can significantly impact your after-tax returns and long-term investment performance.
As always, property owners should consult their tax professional or accountant for advice specific to their situation, but being informed allows you to ask the right questions — before the expense is incurred.
