Have you ever wanted to get a new coat of paint for your office? Or perhaps you have been annoyed by that stain on the carpet and want to replace it with just whole new tiles.
Although renovating your office can be exhilarating, considering the associated costs can sometimes make you anxious.
The biggest contributor to this woe is
having to stay within the designated budget while worrying about taxes. With YYC, we can help you — save on extra costs! In this article, we will outline some strategies to save tax by gaining a better understanding of revenue and capital expenditure.
Differentiate the distinction between revenue and capital expenditure
Let's start with the fundamentals: It is important to differentiate the distinction between revenue and capital expenditure.
Here are the two rules — Capital expenditure is not tax deductible, whereas revenue expenditure is.
According to the Income Tax Act
(ITA) 1967, revenue expenditure includes repair which restores an asset to its original condition or replacements of parts. It does not include changing, altering, or enhancing the condition of the asset. On the other hand, capital expenditure includes repairs or replacement with an element of improvement or renewal to the assets / altering the original condition of the assets.
Example
Almost a decade has passed since the company’s establishment, and you've decided it's time for an office makeover, with the renovation of the floors’ carpet being your top priority.
Given all
the positive aspects you’ve learned about tiles, you feel like it’s time for an upgrade after all these years. Tiles are low maintenance, water resistant, and give off that clean office vibe you've always desired.
Unfortunately, the upgrade to tiles is not tax deductible because it is a capital expenditure, as the original condition of the asset is altered by replacing the floors’ carpet with tiles. It is important to note that only
revenue expenditures are tax deductible (i.e. repairs/replacement costs that restore the assets to its original condition).
Implements, utensils, or articles with a life span of less than two (2) years
Generally, replacement of implements, utensils, or articles that have an expected life span of not more than two (2) years is allowed as a deduction in ascertaining the
adjusted income of the business. Examples of implements, utensils, or articles that can be allowed as a deduction on a replacement basis include dishes, spoons, forks, knives, and pots.
To further elaborate on this concept, picture yourself as a restaurant owner. Let’s say you wish to change the utensils in your restaurant after 2 years. The replacement of utensils in the business will be tax deductible.
