Increasing your income by owning a rental property is great, that is until tax season arrives and you need your file your income taxes.
Earning a rental income can help you reach financial and savings goals and make extra money to pay down debt. But, there is a tax burden that comes from that income. In order to optimize your profits, landlord and rental property tax deductions should be a priority when getting organized during tax season.
How Is Rental Income Taxed In Canada?
The tax burden associated with income tax depends on the type of business the landlord runs. If you are a sole proprietor (an individual), the approach differs from 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. Conversely, in partnerships, the annual income from the rental property is divided between the business partners. Subsequently, each partner pays according to their personal tax bracket.
Corporations are a different beast entirely. Rental properties are subject to the General Corporate Rate of 38%, a federal tax. Provinces can apply extra tax on this income. For example, the rate in Ontario is 11.50% for a total of approximately 50%. However, this does not necessarily represent real numbers. Credits and rental property tax deductions are available to small and large businesses alike, provided they meet the standards set forth by Revenue Canada.
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 are only claimable for the tax year in which the expense was incurred. Other expenses can be claimed down the line.
Current expenses are recurrent by nature. An example is lawn care, something that needs to be done regularly. The short intervals between the expense lend to its status as a current expense. Think of these expenses as temporary, where it is maintenance rather than improvement.
Capital expenses are one-time matters, like running plumbing to the basement unit. It must be a part of the property, done with a view to making the property suitable for renting, and it should offer a lasting benefit. The difference between the two might sound like semantics, but it has very real tax implications.
Current expenses are only deductible for the tax year in which they are incurred. You cannot 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.
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.
Mortgages come with mandatory 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 mortgage interest (assuming the loan finances the rental property). This also includes legal fees, costs of inspection, appraisal, and banking fees. You can deduct loan amounts used to improve the property, but it must be done for the sake of bringing a property to code and using it as a rental. This soft cost can be deducted during the tax year you incur it.
From lawyers to surveyors to accountants, there is a cost to access professional services. The fees associated with running the property are deductible. These range from fees for bookkeeping, rent collection, lease review, and other necessary services. 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.
Everything from pencils to staples to the ink used in the printer for the lease is deductible. You must use the supplies specifically for the purpose of 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. If there is a plumbing issue, an appliance included in the lease breaks, or you repair a window, deduct the cost of the repair. 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, Wages
Including employer contributions, you can deduct 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.
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.
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 is not included in this deduction.
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. The property must be in the general vicinity of the landlord’s principal residence. 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 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 in order to optimize your return.
These deductions represent amounts paid in advance. Referring to accrual method accounting, you claim the cost of the investment over years in which you reap the advantage. Cash method accounting disallows prepaid expense deductions, save for inventory, after two tax years subsequent to incurring the expense.
Other 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. Technically classed as ‘other’ by the government of Canada, these include a range of costs such as:
Ground maintenance and landscaping are deductible as a current expense, meaning you can only claim it on the year when you incur the cost.
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.
If you earn income from the vacant property being rented, the cost to operate it can be deducted. This includes interest on borrowed money used to purchase the land, in addition to property taxes. There are caveats, in that 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 Deduction Most Landlords Forget To Claim
There are expenses that are easy to remember — like the cost of replacing a door. Other costs are often forgotten by landlords, particularly in sole proprietorships. The higher your deductible claim, the higher your net earnings become. To achieve this, 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. If the unit is, for instance, a basement suite of your principal residence that is covered under the same insurance, claim the representative portion of the cost.
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.
FAQs on Landlord Tax Deductions
Is regular rent tax deductible in Canada?
Can I deduct my condo fees for a rental property in Canada?
Do I need rental income to deduct rental expenses?
I can’t pay my income property tax bill, what should I do?
Which Landlord And Rental Property Tax Deductions Should Your Claim?
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.