# Water heater for rental home a current or capital expense



## digitalatlas (Jun 6, 2015)

I had though this was pretty clear but recently got into a disagreement with a friend who also has some rentals.

If you replace an old water heater, I thought this would be a current expense in the year you buy it because it's maintenance, to replace am existing unit. I'm not adding an additional water heater like a capital addition. Same goes with other appliances in the kitchen, are these all capital expenses even if you're replacing an old unit? 

Thanks


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## Numbersman61 (Jan 26, 2015)

digitalatlas said:


> I had though this was pretty clear but recently got into a disagreement with a friend who also has some rentals.
> 
> If you replace an old water heater, I thought this would be a current expense in the year you buy it because it's maintenance, to replace am existing unit. I'm not adding an additional water heater like a capital addition. Same goes with other appliances in the kitchen, are these all capital expenses even if you're replacing an old unit?
> 
> Thanks


Normally, these are considered class 8 capital expenditures. See page 18 of guide (link attached)

https://www.canada.ca/content/dam/cra-arc/formspubs/pub/t4036/t4036-17e.pdf


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## nathan79 (Feb 21, 2011)

It depends on why you are replacing it? Did it stop working, or did you just want to upgrade to a better unit?

Upgrades always count as capital expenses because they add value to the property. On the other hand, replacing a broken unit with an equivalent unit is considered a current expense, because it simply restores the original value to the property.

Where it gets tricky is when you're replacing the broken unit with a better unit. This changes it from a current expense to a capital expense because you're adding value. An example would be switching from a small water tank to a larger one, one with more features, or installing a tankless water heater.



digitalatlas said:


> Same goes with other appliances in the kitchen, are these all capital expenses even if you're replacing an old unit?


I don't think that's quite the same. There's a difference between a fixture (ie; something attached to the house) and an appliance, which can simply be unplugged and taken away. So I think appliances in the kitchen would be capital expenses, except maybe the dishwasher - not positive on that, though.


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## CPA Candidate (Dec 15, 2013)

If you dispose of a capital item like a water heater and replace it with a new one, you would derecognize the old item and add the new item to the CCA pool for that class of items. This is tax, not accounting.

Remove the lower of cost or proceeds from sale from the CCA class and add the new cost of the capital item to the pool, subject to 1/2 year rules.

http://www.htkconsulting.com/HTKNotes/Tax/Personal/business income/CAPITAL COST ALLOWANCE.pdf

Capital items always use the CCA system under the appropriate class, doesn't matter whether it is brand new or a replacement of an existing item.


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## nathan79 (Feb 21, 2011)

Determine if the expenses are for a part of the property, or are they separate from the property.
For replacement of assets that are separate from the building, the cost would normally be capitalized. Examples: refrigerators, stoves, compressors.
When replacing an asset that is part of the building, the cost would normally be expensed. Examples: wiring, plumbing, *hot water tanks*.

If the property is repaired and improved to better than its original condition (when it was new), then the expense is capitalized. Example: replacing wooden steps with concrete ones.

https://www.taxtips.ca/personaltax/propertyrental/rentalexpenses.htm


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## ian (Jun 18, 2016)

current expense


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## CPA Candidate (Dec 15, 2013)

nathan79 said:


> Determine if the expenses are for a part of the property, or are they separate from the property.
> For replacement of assets that are separate from the building, the cost would normally be capitalized. Examples: refrigerators, stoves, compressors.
> When replacing an asset that is part of the building, the cost would normally be expensed. Examples: wiring, plumbing, *hot water tanks*.
> 
> ...


I would not consider a hot water tank part of a building. It is easy to remove in less than one hour and can be deployed elsewhere, like appliances. Wiring and plumbing are basically impossible to move and use in another building. Apples to oranges comparison in my opinion.

Do not take taxtips.ca to be the final say on such matters. It is a website to give general advice to laymen. The advice given on current expenses and capital is blending accounting and tax. The rules on the use of CCA pools is crystal clear for capital items, old items get removed and new items added. It does not matter whether it is an upgrade, maintenance or whatever. A hot water tank is a long lasting asset, it is never a current period expense when replaced.

Now if the hot water tank broke down and needed a repair but could still be used, that's a current period expense.


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## twa2w (Mar 5, 2016)

A hot water tank is part of the building. If I sell a house, the hot water tank is considered part of the house. I do not remove it like I might with a refrigerator or range.
Same with the kitchen cupboards. They could easily be removed and used in another building( also in less than an hour) but they form part of the building just like the sinks, tubs and faucets. 

Try taking the hotwater heater, furnace, kitchen cupboards out of the next house you sell and take them with you. You will soon get an expensive lesson on what is considered part of the real estate.

I won't comment on the tax issue.

Slightly off topic but interesting that different parts of the country have different takes on appliances when it comes to sales.
In Ontario you almost always take appliances with you. In Alberta, apliances are almost always sold with the house.
( non rental homes that is).


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## Numbersman61 (Jan 26, 2015)

I believe my prior comment was somewhat incorrect in that I was focusing on appliances which would normally be class 8. I feel the hot water heater is part of the building and its replacement is properly categorized as repairs and maintenance expense.


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## digitalatlas (Jun 6, 2015)

I'm coming to the conclusion that the water heater is not part of the house, and if should be capitalized.. Drat. Here's why.

It is an appliance, and can be removed, unlike plumbing. Recently Reliance sent a tech because the hot water wasn't working. He verified the water was hot, but not being distributed because of a faulty hot water mixing valve. This is part of the building, not the water heater, so not covered by the rental agreement. I would need a plumber to fix the valve because it's part of the house.

I'm in Ontario, it is common to rent water heaters, so usually they are transfered (as rental agreement) to the new owner, but that doesn't mean it's a part of the house. Renting water heaters is apparently less common in other provinces. If you remove it, you are penalized no because you are removing a part of the house, but because you've probably broken the terms of the rental agreement.

I'm discussing the scenario where it breaks down and I replace it with the same or similar model, but that's hard after 10 years. So it's probably a capital expense. I just didn't want to have to start tracking and depreciating it over time.

Im not depreciating any of the current appliances (including water heater) because it's a hassle and it was not worth much when I bought the house. But new appliances, even to replace old broken ones, may be worth tracking and depreciating. 

Has anyone been challenged on this by CRA as to capital vs current? Or have actual experience? 

I would have preferred it as current, because its not like adding a finished basement. It's replacing an appliance that was there when the house was bought, even if it's not part of the house


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