TAX DEDUCTIONS, WRITE-OFFS, EXPENSES AND TAX TIPS FOR RENTAL PROPERTIES IN CANADA
Own a rental property in Canada? Get some tax information here...
As a landlord, your priority is to deal with your current tenant(s) and ensure that your property is being maintained to an acceptable standard. The last thing on your mind is the accounting and tax implications that coincide with owning a rental property in Canada.
You can ignore it for the time being, but eventually, it will catch up to you.
As a landlord and tax accountant myself, I thought I would provide a crash-course into the tax implications of owning a rental property: Rental Income, Tax Deductions and Write-Offs, Depreciation, Expenses (Capital and Non-Capital) and Filings.
If you own a rental property in Canada and you hold title to it, you must report the activities of the rental property on your personal tax return in the Statement of Real Estate Rentals.
Among other things, the schedule asks for the address of the property, units rented, the rental income generated from the property and the expenses incurred to keep the property operational.
In the Statement of Real Estate Rentals schedule, you will deduct all of your expenses from your gross rental income. The rental income remaining (if any) is what you pay tax on.
This is pretty straight-forward. All rents collected from a specific property make up your gross rental income.
Expenses, Deductions and Write-offs are all used interchangeably. They represent the costs that you as a landlord incurred to keep the rental property in business.
There are two types of expenses landlords need to be aware of:
1) Non-Capital Expenditures
2) Capital Expenditures
Non-capital expenditures are expenses that re-occur periodically (i.e. repairs and maintenance, utilities, interest payments, professional fees,etc.).
Non-capital expenditures are deducted from your rental income in full in the year they occurred and reduce your overall tax burden.
Typical expenses for a rental property in Canada are: Property insurance, mortgage interest (only the interest), advertising, legal fees, accounting fees, property manager wages, repairs, property taxes, utilities, supplies and vehicle expenses (if you fulfill certain criteria).
Capital expenditures are expenses that provide a lasting benefit or advantage (i.e. the cost of a new roof or a new backyard deck which is expected to last many years).
Capital expenditures are slowly deducted from your rental income year-over-year, through depreciation, rather than in full in the year they occurred. For example, if a new roof costs $10,000 and lasts 15 years, you will get a $667 expense deduction each year ($10,000 / 15 years).
In practice, the calculation is different and is driven by Canada Revenue Agency's (CRA's) guidelines, but this is the easiest way to explain depreciation. The details of depreciation can get complex and are beyond the scope of this write-up, so ensure you speak to an accountant before you proceed with filing your personal tax return.
What Isn't Deductible?
The following are expenditures that cannot be deducted:
- If you live in part of the property you are renting, your personal portion has to be calculated and cannot be deducted
- The principal payments on your mortgage
- Land transfer taxes
Each rental property's income and expenses have to be tracked separately, and as mentioned before, this information is filed on your personal income tax return in a separate schedule that relates to real estate rental properties.
Please ensure that you speak to an accountant as early as possible to ensure that you are not leaving any deductions on the table, and furthermore, to ensure that you are treating capital expenditures correctly, since this can have a significant tax implication if it is not dealt with appropriately.