Owning a rental property can boost your income and help you reach your financial goals faster. But there’s a tax burden that comes with that income.
Luckily, there are several ways to save on your taxes owed. Be sure to make rental property tax deductions a priority come tax time.
Key Takeaways
- Landlords can save on taxes by claiming various deductions for expenses related to their rental property.
- Current expenses, such as advertising and insurance, can be deducted in the year they are incurred.
- Capital expenses, such as major renovations, are spread out over time for tax purposes.
Tax Deductions For Rental Property In Canada: Common Expenses You Can Claim
Expenses aren’t all alike. The costs associated with running a rental property are extensive, so results are better if you increase the rental property tax deductions you use.
Advertising
The cost associated with posting ads for the rental property, whether the platform is digital or analog, is a deductible cost. Any fees you paid to make the listing are deductible and should be expensed during the same year as the cost was incurred.
Insurance
Generally, before you can secure a mortgage, you’ll need to have home or property insurance. If you are paying property insurance, then you can deduct the amount paid during the year. This claim is limited to the expenses of the tax year.
If the rental constitutes a portion of your home, you can only claim the percentage of that amount that represents the rental space relative to the whole coverage range.
Property Taxes
Landlords can deduct the cost of property taxes, provided the rental was available for the period covered by the property tax. This also applies to the period during which the unit is rented. Both the land and the building are deductible property tax expenses.
Repairs and Maintenance
You can deduct the cost of repairs that are necessary to keep your rental property in good working condition. These are considered current expenses and include things like:
- Fixing plumbing or heating issues
- Repairing a broken appliance (if included in the lease)
- Replacing a cracked or broken window
Can You Claim Renovation Expenses As A Tax Deductible?
Renovations that add clear value, extend the lifespan of the property, or result in a fundamental adaptation must be capitalized rather than deducted in the year incurred. These are capital expenses, which include:
- Adding a bedroom or bathroom
- Upgrading electrical wiring
- Adding a shed
- Replacing the roof
- Major renovations or structural changes
| Current Expenses Vs. Capital Expenses It’s important to understand the difference between a repair and a capital improvement, as it affects how and when you can claim the expense on your taxes. Here are some ways that current expenses differ from capital expenses: – Recurrent Vs. One-Time Expenses. Current expenses are recurrent by nature. An example is lawn care, which needs to be done regularly. On the other hand, capital expenses are one-time matters, like running plumbing to the basement unit. – Deduction Calculations. Current expenses are only deductible for the tax year in which they are incurred. Capital expenses are more difficult to calculate. Based on the category of the cost, it is spread over time. |
Utilities
Deductible expenses for utilities include essentials like electricity, gas, and water. It also extends to cable and internet services. However, keep in mind that you cannot deduct this if the tenant is paying for the utilities.
Learn more: Tax Deduction vs. Tax Credit In Canada
Can You Claim Mortgage Interest As A Tax Deductible On A Rental Property?
Yes, mortgage interest is generally tax-deductible on a rental property, provided the loan is used to finance the purchase or improvement of that property.
As a rental property owner, you can claim a variety of related expenses, including:
- Mortgage interest (assuming the loan finances the rental property)
- Costs associated with getting a mortgage, such as legal fees, inspection fees, title insurance costs, appraisal costs, and banking fees.
| Note: For loan interest, you can only deduct the amounts used for soft costs such as renovations and upgrades to the property. This soft cost can be deducted during the tax year you incur it. |
Are Condo Fees Tax Deductible?
If you receive rental income from a condominium property, you can claim the cost of condo/strata fees, including your co-payment for maintenance and current expenses of the common property.
Learn more: How Much Should Your Strata Fees Be?
Can You Deduct Costs Associated With Managing The Rental Property?
The fees associated with running the property are deductible, and may include the following:
- Lawyer fees
- Surveyor fees
- Accountant fees
- Bookkeeping fees
- Rent collection fees
- Lease review fees
However, there is a caveat when it comes to legal costs. When you purchase a property, you cannot deduct the entire cost from your rental income. It must be split between the land and the property being rented.
Office Expenses
Everything from pencils to staples to the ink used in the printer for the lease is deductible, as long as the supplies are used specifically for business. If the items are used for personal applications, they do not qualify for the deduction.
If something is split between both, the deduction is a portion of the overall expense, representing the business’s cost of the supply.
Management And Administration Fees
If you outsource the management of a property to either a business or an individual, you can deduct the fees. Another cost that applies is that of paying someone to show the property to potential tenants. It also covers administrative organization, managing the books, and collecting rent.
Salaries, Benefits, and Wages
You can deduct employer contributions, as well as the amount paid to maintenance staff, superintendents, building managers or other property caretakers. However, the value of your personal services cannot be deducted.
You must also deduct Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Employment Insurance premiums paid on behalf of employees. Additional rental property tax deductions in this category extend to insurance premiums resulting from covered employees’ claims.
Travel And Motor Vehicle Expenses
Travel costs like fuel related to managing a rental property, such as supervising repairs, collecting rent, or showing the property, are tax-deductible, but only when they directly relate to the business operations of the rental.
However, strict conditions apply. Eligibility depends on factors such as the number of properties you own, the property’s proximity to your residence, and whether you perform the work. Accurate mileage logs, receipts, and documentation are essential to support any claims.
Even More Rental Expenses
The Canada Revenue Agency (CRA) classifies some rental expenses as “Other” and allows you to claim them.
- Landscaping & Ground Maintenance. Ground maintenance and landscaping are deductible as a current expense, meaning you can only claim them in the year when you incur the cost.
- Lease Cancellation Payments. If you paid, or had an amount payable, to tenants for the purpose of cancelling the lease, you can claim the expense in this section. It is prorated by the days remaining on the lease, provided the maturation period of the lease is shorter than 40 years.
- Vacant Land. If you’re earning rental income from vacant land (e.g. as grazing fields, farmland, or storage), operating costs like property taxes and loan interest are deductible. However, you can’t use these deductions to create a rental loss.
How High Is Rental Income Taxed In Canada?
The tax burden associated with rental properties depends on the type of business the landlord runs. For instance, the approach for sole proprietors (individuals) differs compared to corporations and partnerships.
In general, individuals who rent out personally-held units are taxed at the same rate as their personal taxes. As such, it depends on the annual income made by the proprietor.
Short-Term Vs. Long-Term Rental Tax Differences
Short-term rentals and long-term rentals are treated differently when it comes to taxation.
- Long-Term Rentals: These rentals are taxed as passive income. Landlords report rental income on Form T776 and can deduct various expenses, like mortgage interest, property taxes, insurance, and repairs, as mentioned. GST/HST typically doesn’t apply to long-term residential rentals, so you can’t claim an input tax credit (ITC) to recover these taxes.
- Short-Term Rentals: Properties like Airbnb-style accommodations that are rented for a short period are subject to stricter tax rules. Owners must register, collect and remit GST/HST on short-term rentals, unless they qualify as small suppliers. Plus, landlords cannot deduct rental expenses if the property is non-compliant with local licensing, registration, or zoning laws.
Overall, long-term rentals offer simpler tax reporting and more deductions, while short-term rentals require stricter compliance and may be subject to additional tax burdens.
Common Mistakes Landlords Make With Tax Deductions
Many landlords in Canada miss out on tax savings by making certain mistakes when claiming deductions, including the following:
- Not Separating Current & Capital Expenses: Regular repairs are deductible in the year they occur. But major upgrades, like replacing a roof, must be capitalized and depreciated over time. By misclassifying expenses, you could be denied claims or even audited.
- Not Keeping Proper Records: The CRA requires detailed documentation for all claimed expenses, including receipts and invoices. If you don’t have these, you may not be able to make deductions.
- Forgetting To Claim Mortgage Interest: Some landlords may assume that the full mortgage payment is deductible. But only the interest portion qualifies, and not the principal.
- Overclaiming: Landlords who rent part of their home may not prorate expenses accurately, which can lead to overclaims and non-compliance with CRA rules.
Final Thoughts
Rental properties pose a terrific opportunity to supplement income, particularly if the tax burden is properly handled. You can use a professional accountant to handle the taxes; which, in itself, is a deductible expense. By identifying all the potential deductions, you can optimize your earnings while providing an important service as a landlord.
