Everything you need to know about claiming renovations on your taxes.

If you’re reading this, it means you either just opened a clinic or are thinking of opening one… CONGRATULATIONS!

Opening your own space is such a big step! It takes a lot of hard work, late nights, and money to get this done! The good news? Your renovations are tax-deductible!

For accounting purposes, we call your renovations Leasehold Improvements. The CRA has specific rules around what and how much you can claim as a tax deduction for these renovations.

Your leasehold improvements include any work you have done to a rental space to make it YOUR space. This includes flooring, adding (or destroying) walls, electrical, plumbing, and all the beautiful finishes!

Here is a hit list of the main items you can include as a leasehold improvement:

Demolition and removal of the old space
The cost of an interior designer
All construction work for walls, stairs, etc.
New windows and installation
New electrical and plumbing
Supplies and cost of labour of drywall installation
Flooring and paint
Light fixtures
Work done to the exterior of the building

All these costs are grouped together and apply the same rate for your annual tax deduction.

When you complete an annual tax filing, you can claim annual deductions on your leasehold improvements through the Capital Cost Allowance (CCA). CCA applies to all capital assets, which are large expenses that provide value to your company for more than a year. There is a specific predetermined percentage of your cost that CRA will allow you to deduct each year - this is called a Class. There are many different classes of capital assets. When you track your leasehold improvements, make sure to track your furniture, linens, electronics, and medical equipment separately since they fall into different Classes.

The CCA Class for leasehold improvements is Class 13. You will see all your leasehold improvement allotted under Class 13 on your annual tax return. The rate you can deduct each year depends on the duration of your lease. Leasehold improvements can be depreciated for a maximum of 15 years, even if your lease is longer.

On all capital assets, there is a half-year rule in the year you buy. This means that you can only claim 50% of your maximum CCA deduction in the first year. This is a rule to keep it simple since CRA doesn’t know when you bought all your items throughout the year.

In your first year, the deduction works by taking your total cost and multiplying that by your deduction percentage and then by 50%. This will give you an adjusted cost (total cost less CCA taken this year). In year 2, your deduction will be your adjusted cost multiplied by your deduction percentage, giving you a new adjusted cost to use for the next year. This cycle keeps going until you write-off the entire cost of the leasehold improvement has been taken.

Ex. Let’s say you signed a 10-year lease on a new clinic space. This means that your annual CCA rate will be 1/10 = 10% of your cost or adjusted cost.

If you renovated the space for $100,000 last year then you are able to take

$100,000 X 10% CCA X 50% half-year rule = $5,000 as a tax deduction
Your adjusted cost at the end of the year will be $100,000 - $5,000 = $95,000.

Next year you can take

$95,000 X 10% = $9.500 as a tax deduction

This will get you to a new adjusted cost of $95,000 - $9,500 = $85,500 to use for the next year… and so on until your adjusted cost is $0.

In your first year of operations, you may not have taxable income, so you can choose to claim nothing from CCA - on any of your new capital assets - to save the deduction for future years! When you have taxable income to apply it to - YAY for a tax strategy that saves you more money!

Also, keep in mind that leasehold improvements are not the same as building improvements. A building improvement generally benefits everyone occupying the building or shared rented space, so it should be paid for by your landlord. A leasehold improvement is something that only benefits you.