Net-to-the Landlord Lease
You’ve leased your commercial building to a number of tenants, on a fully net-to-the-landlord basis. Ideally, your lease document allows you to pass through costs/expenses related to the building, to your tenants. Typically this pass through of costs is calculated proportional to the space the tenants occupy.
Can can you deduct all costs? No, typically not. Not all costs are treated equally, for tax purposes.
Capital vs. Current costs
This is where the notion of Capital vs. Current costs becomes important. Both may be legitimate expenses incurred to enhance the property value and earn rental income. Whether they can be passed through to the tenant is dependent upon whether they are considered a current cost, i.e. incurred in the current year. Many costs can be, but longer term items, i.e. capital costs, may be more appropriately subject to Capital Cost Allowance deductions over a number of years.
When can costs be passed through to tenants?
If its a current expense it is typically one that re-occurs. Think of such expenses as re-painting the hallways, or cleaning the carpets in the lobby.
On the other hand, Capital expenses are items that provide a lasting benefit, and typically extend the useful life of the building. Perhaps you are replacing the building roof. Its an expense that improves a building beyond its current condition.
Another way to look at this is to consider whether the expense is for an asset that is new to the property. If you are installing a new rooftop air condition unit, its a capital asset. If you are expending funds to maintain an existing air conditioning unit, its a current expense.
Costs vs. Competitiveness
As a landlord, you need to be mindful of maintaining your property so as to attract and retain tenants. An important consideration for tenants is the physical appearance and quality of maintenance and upkeep your property provides. Value is also considered by tenants. Operating costs in your building will be compared to others, in the tenants lease decision making process. As a landlord you will need to be balancing costs vs. competitiveness.
For expert advice, consult your Accountant. A recent article by Collins Barrow, entitled To Deduct or Not Deduct; That is the Question, provides good guidance for Canadian taxpayers on the tax implications when incurring property related expenses.