Insurance claim payouts

[PeteH]

Hi,

How does one report an insurance payout as a result of damages on a rental property ?

Normally there will be a deductible amount for the coverage, so does one simply deduct the deductible amount as "expense" and the remaining balance wouldn't need to be reported as there is really no more expense for the damage? 

Thanks, 

[BLSM]

Hi Pete

I think it depends on the breakdown of the payout. 

Was some for loss of rental income?  If so, that amount would be considered rental income.

The deductible is likely a current expense.

Here is an article which may help you some.  https://realestatetaxtips.ca/tax-implications-on-claiming-insurance-on-property-damage/

Brenda

 

[PeteH]

1 hour ago, BLSM said:

Hi Pete

I think it depends on the breakdown of the payout. 

Was some for loss of rental income?  If so, that amount would be considered rental income.

The deductible is likely a current expense.

Here is an article which may help you some.  https://realestatetaxtips.ca/tax-implications-on-claiming-insurance-on-property-damage/

Brenda

 

Thanks Brenda, 

I was referring to purely repairing a property damage (eg. repairing a roof due to collapse of a tree). In that case, I suppose the insurance would pay for the actual cost to repair the roof LESS any deductible. 

From the article you attached, my understanding then is I can expense the deductible as current expense, while the amount that is paid out by insurance will be added to the cost basis of the property since its a capital cost (ie. new replaced roof)? 

Thanks,

[Geo123]

Hello PeteH,

You can refer to the below links.  You can also contact the CRA.

(1.) T776 Other Expenses
https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html#P439_45796

(2.)  CCA Impact
Income Tax Folio S3-F3-C1, Replacement Property
Subsections 13(4) and 44(1) permit a taxpayer to elect to defer the recognition of recapture (income) of capital cost allowance (CCA) or capital gains where a property was involuntarily disposed of,
or a former business property was voluntarily disposed of, and a replacement property is acquired. Where all the applicable conditions are met, these rules generally allow taxpayers to replace certain property
without incurring immediate tax consequences.
https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/folio-3-capital-transactions/income-tax-folio-s3-f3-c1-replacement-property.html

[BLSM]

Pete, if you are repairing damage, that may be a current expense.

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/rental-income/current-expenses-capital-expenses.html

If you put a fancy new roof on, that's capital, but if you're just repairing damage and bringing it back to what it was, it's current.

Does the expense maintain or improve the property?

The cost of a repair that improves a property beyond its original condition is probably a capital expense. If you replace wooden steps with concrete steps, the cost is a capital expense. Footnote1

An expense that simply restores a property to its original condition is usually a current expense. For example, the cost of repairing wooden steps is a current expense.

[PeteH]

Hi Brenda, 

Yes - it makes sense a simple replacement would be current expense. But one thing puzzles me is that a roof replacement (even with insurance coverage), the cost can be high, can I really take the full amount less the deductible as current expense? It could easily bring the rental property's net income to be negative.

[BLSM]

Pete, I might call CRA on that one, just to be sure.   They are really helpful, and right now, the site shows wait time of only 10 minutes.  That's about 4 hours less than during the busier part of tax time.

Are they doing the whole roof?  In that case, it would more likely be capital, because it will effectively extend the life of the building.  If they are only repairing the damaged part, that's different.

A loss isn't a bad thing, as long as it's legit.  For instance, if the market was bad, and you had trouble getting renters, or couldn't rent due to repairing tenant damage, you could very well lose money for that year.

[PeteH]

Hi Brenda, 

Thanks for the clarification. The scale of repair makes sense, as I was thinking the same regarding the extended life of the building with full replaced roof. 

I will also call CRA just to clarify. 

Thanks again for your feedbacks 👍

[BLSM]

You are welcome.  Good luck