What is a capital improvement?

Definition of Capital Improvement

A capital improvement is any addition, restoration, or other permanent structural change of a property by an individual homeowner or a large-scale property owner designed to enhance the property’s overall value. A capital improvement is a property upgrade that is completed in order to extend the useful life of a property or adapt the property for a new purpose.

Why is this term important?

The use of capital improvements can help to increase the overall value of a property, which often allows landlords to charge more per unit in rent, as well as potentially increase the current market value of a property.

While capital improvements cost money out-of-pocket for a landlord or property owner, there are some tax advantages. Most capital improvements costs are considered a tax deduction by the Canada Revenue Agency. Also, many landlords are able to recuperate some of the capital improvement costs by applying for and receiving permission to raise monthly rents on current tenants.

Examples of term

A landlord that pays to improve the plumbing pipes and fixtures in a six-plex that is rented out to tenants would have to pay for this upgrade out-of-pocket but could claim the cost as a capital improvement.

For residential homeowners, major upgrades and renovations are often considered capital improvements on a property, but homeowners are not able to capture these expenses as tax deductions under current CRA regulations. However, these capital improvements will probably help raise the current market value of the property.