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 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.
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.
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.
Current Expenses Vs. Capital Expenses
Tax deductions are a matter of both money and time, and the expenses you can claim for rental income depend on both factors. Some costs can only be claimed for the tax year in which the expense was incurred. Other expenses can be claimed down the line.
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. The short intervals between these expenses lend to the status of ‘current expense’. Think of these expenses as temporary, which involve maintenance rather than improvement.
On the other hand, capital expenses are one-time matters, like running plumbing to the basement unit. It must be a part of the property and make the property suitable for renting. The difference between the two might sound like semantics, but it has very real tax implications.
Deduction Calculations
Current expenses are only deductible for the tax year in which they are incurred. For instance, you can’t deduct the cost of painting your walls two years ago for a rental this year, even if the tenant still benefits from that paint job.
Capital expenses are more difficult to calculate. Based on the category of the cost, it is spread over time. To maximize your claim, it’s critical to know what you can claim as a deduction, how much you can claim, and when.
Landlord And Rental Property Tax Deductions Canada
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 made 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 towards 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.
Interest And Bank Charges
In this category, there are plenty of expenses you can claim, such as the following:
- Mortgage interest (assuming the loan finances the rental property)
- Costs associated with getting a mortgage such as legal fees, inspection fees, appraisals, 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.
Professional Fees
There is a cost to access professional services. 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’ 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.
Repairs and Maintenance
When you are deducting a repair cost, be sure that it is a clear-cut repair. For example, you can deduct the cost of repairing a plumbing issue, a broken-down appliance (that is part of the lease), or a cracked window. These fall under the category of current expenses.
Other costs must be capitalized, including anything that adds clear value, extends the lifespan of the property, or results in a fundamental adaptation. Converting a two-bedroom to a three-bedroom, wiring, adding a bathroom, and replacing the roof are all capital expenses.
Salaries, Benefits, and Wages
You can deduct employer contributions, as well as the amount paid to maintenance staff, superintendents, or other property caretakers. The value of your personal services cannot be deducted.
You must also deduct Canada Pension Plan, Quebec Pension Plan, and Employment Insurance premiums. Additional rental property tax deductions in this category extend to insurance premiums resulting from covered employees’ claims.
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.
Travel
The cost of going to and from the rental is deductible, provided it relates to the business operations of managing the property. This extends to repair supervision, rent collection, and showing the property. If you live out of town, the price of lodging and meals are not included in this deduction.
Utilities
Deductible expenses for utilities include essentials like power, oil, gas, and water. It also extends to cable services. Keep in mind that you cannot deduct this if the tenant is paying for the utilities.
Motor Vehicle Expenses
The system for this type of deduction is done largely in good faith. Those who own only one rental property can deduct motor vehicle costs in very specific situations.
To deduct motor vehicle expenses, the property must be in the general vicinity of the landlord’s principal residence. Further, the landlord must personally complete all the repairs and upkeep on the property. Additionally, they must use the motor vehicle against which the deduction is being claimed to transport materials between their home and the rental.
Those with two or more properties can deduct a reasonable amount for rent collection, unlike those with a single property. This means that the landlord must utilize the most efficient route for deduction purposes. In addition, the landlord can claim the cost of repair supervision and management. Receipts are required, in addition to mileage tracking.
Vehicle-related expenses are some of the most nuanced claims, so be sure to keep accurate records to optimize your return.
Prepaid Expenses
These deductions represent amounts paid in advance. Referring to the accrual accounting method, you claim the cost of the investment over years in which you reap the advantage.
Conversely, the cash accounting method disallows prepaid expense deductions (except for inventory) two tax years after incurring the expense.
Even More Rental Expenses
A major part of tax management is categorization, meaning your rental property tax deductions must fall in the correct section to be claimed properly. These are technically classed as ‘other’ by the government of Canada and include a range of costs, such as:
Landscaping
Ground maintenance and landscaping are deductible as a current expense, meaning you can only claim them in the year when you incur the cost.
Condo Fees
If you receive rental income from a condominium property, you can claim the cost of condo fees, including your co-payment for maintenance and current expenses of the common property.
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 earn income from the vacant property being rented, the cost to operate it can be deducted. This includes property taxes and interest on borrowed money used to purchase the land.
There are caveats, however. You cannot use this to add to a rental loss or limit other income sources. An example is when someone purchases a lot and rents it out as a grazing field for cattle, as farmland, or as storage.
When filing your taxes, this is where you indicate the expenses not covered in other parts of the claim. To check if it is a legitimate claim, ensure that on Form T776, Line 9270 does not replicate any amount separately claimed on the form.
Other Deductions Most Landlords Forget To Claim
Some expenses are easy to remember — like the cost of replacing a door. Other costs, however, are often forgotten by landlords, particularly in sole proprietorships. The higher your deductible claim, the higher your net earnings become.
Remember to claim every dollar possible, including:
- Mortgage interest: Provided your rental property is mortgaged, you can deduct the interest accrued on the loan.
- Condo fees: Assuming your rental is a condo where you must contribute to the upkeep of the building, you can claim these expenses at the end of the year.
- Insurance: Chances are, you have insurance on the property, so you should deduct the premium for the rental unit every year. For instance, if the unit is
Keep thorough records of all aspects of your rental property, including communication, transportation, and expenses. Equipped with this information and some savvy tax maneuvering, you can drastically increase your earnings.
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.
