Encyclopedia
Capital expenditure (CapEx)
Money spent to buy, replace or improve something that lasts, like a roof or heating, ventilation and air conditioning (HVAC) unit, as opposed to routine repairs. Tax treatment and lease cost-sharing often differ for capital items.
For example: A tenant reviewing operating costs sees a new rooftop unit in the statement and checks whether the lease lets the landlord charge capital items. (Illustration only, not a real deal.)
The Canada Revenue Agency (CRA) handles federal tax. Official source: CRA: current or capital expenses
Example only, not a real client. Say you are buying an older retail building. The roof and heating units are near the end of their life. You budget for those capital costs in your first few years and factor them into your offer, rather than letting them eat into your returns later.
What I’d tell a friend
Budget for big repairs separately from day-to-day costs. Ask the seller for the age of major systems.
Why it matters to you
Roofs, boilers and parking lots don't show up in net operating income, but they still cost money. A buyer who ignores them overpays, and a tenant whose lease passes them through pays for someone else's building.
How to use it in your deal
Buyers should review the property's CapEx history and upcoming needs using a building condition assessment, and budget reserves accordingly. Check leases to see whether CapEx can be recovered from tenants; many leases exclude capital costs, or allow only amortized recovery over the item's useful life.
For tax, CapEx is usually added to the capital cost and depreciated through capital cost allowance rather than deducted at once, so ask your accountant. Owners should plan major replacements ahead to avoid surprises and tenant disputes. Lenders may require CapEx reserves. Net operating income often excludes CapEx, so a property with high NOI but big upcoming capital needs may be less valuable than it looks.
Strata owners face CapEx through the contingency reserve fund and special levies. Keep invoices and warranties, which help with taxes, recoveries and resale. When comparing two buildings, add expected CapEx over your hold period to the price to see the real cost.
Mistakes I see
Ignoring upcoming CapEx. Assuming tenants will pay. Expensing capital items for tax.
In BC and Vancouver
The Income Tax Act and CRA's CCA rules govern tax treatment.
Official sources: CRA: claiming capital cost allowance · Income Tax Act (Justice Laws)
What it means
Capital expenditures are spending on major improvements or replacements that last for years, such as a new roof, elevator or parking lot repaving.
They are usually treated differently from operating costs for tax and for lease cost-sharing.
Planning for them
Use a building condition assessment to estimate timing and cost of major items.
Check how the leases treat capital costs. Some let landlords recover part of them from tenants, and some do not.
Questions to ask before you sign
- What CapEx is coming?
- Can it be recovered?
- How is it taxed?
- Are reserves required?
Keep reading
Related terms: Operating costs, Capital cost allowance (CCA), Building condition assessment
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.