Claiming Basement Renovation Costs

Are you planning on renovating your basement for rental purposes? If so, then start your drills and put on your hard hat because this week’s tax tip is all about claiming basement renovation costs!

 Are the sounds of demolition becoming routine? Are hammers and drills becoming your alarm clock? You must be undergoing basement renovations. I am commonly asked if I can write off basement renovation costs if I’m planning to rent out my basement. On this week’s tax tip we will walk you through claiming your basement renovation costs.

The cost to renovate your basement suite will likely be considered as capital expenditure rather than a deductible current expense. These capital expenditures would then be added to the Adjusted Cost Base, also known as the ACB of your property.

Should you opt to claim capital costs allowance, these renovations will increase the basis for claiming CCA every single year. Learn how to prepare tax returns for your rental properties in Canada.

You may be wondering whether claiming CCA on the basement renovations and your property is going to increase your taxes in the future. The answer is an absolute yes! This is provided that you sell your property for more than the original cost plus the renovations. The CCA that you previously claimed is 100% included in your income in the year of sale – this is known as recapture.

Remember recapture is different than the 50% income inclusion for capital gains.

Let’s say you don’t claim CCA are there still benefits? The answer is yes. The increased ACB by virtue of the renovations will reduce your taxable capital gain in the year of sale. The capital gain will be calculated as the difference between the selling price and the ACB – the higher the ACB the lower the gain. Learn more about tax on real estate in Canada.

 Important Information Alert:

If the 2 conditions below are met, you can claim the principal residence exemption on the sale of your home thereby avoiding capital gain tax.

1. The rented area, your basement,  does not represent a significant portion of your home
2. You are not claiming capital cost allowance on any part of the home.

So Here’s the Tip:
Do not deduct basement renovation costs. If you do, chances are you are going to be flagged for a tax audit.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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