RENTAL PROPERTY TAX RULES (AN OVERVIEW)
BY ROBERT BRUCE, CA
Many people are purchasing rental properties as a way to diversify their investment portfolios. Whether the property is an apartment building, a condominium, or a basement suite, the income and expenses must be reported to Canada Customs and Revenue Agency (“CCRA”) on the owner(s) personal tax return(s). This information is intended for Canadian residents only.
Who reports the rental income or loss?
The person who owns the rental property has to report the rental income or loss. If you are a co-owner of the rental property, your share of the rental income or loss will depend on your share of ownership. Report the rental income the same way for each year you own that rental property. In other words, you cannot change the percentage of the rental income or loss you report each year unless the percentage of your ownership in the property changes.
Expenses you can deduct
� Interest and financing fees
� Maintenance and repairs
� Management and administration fees
� Office expenses
� Legal, accounting, and other professional fees
� Property taxes
� Salaries, wages, and benefits
Interest & Financing Fees
You can deduct interest on money you borrow to buy or improve your rental property. You can also deduct interest you paid to tenants on rental deposits.
As well you can deduct certain fees you have when you get a mortgage or loan to buy or improve your rental property. These fees include:
. • mortgage applications, appraisals, processing, and insurance fees;
. • mortgage guarantee fees;
. • mortgage brokerage and finder's fees; and
. • legal fees related to mortgage financing.
You deduct these fees over a period of five years. Deduct 20% in the current taxation year and 20% in each of the four following years.
The goal of this information sheet is to provide a broad overview of the tax consequences of owning a rental property. This should not be construed as investment or tax advice nor does its appearance imply an endorsement by the writer. An investor's best course of action must be based on individual circumstances.
Always consult a professional tax accountant before purchasing any investment property.
Expenses you cannot deduct
� Land transfer taxes
� Mortgage principal
� Value of your own labour
If you rent part of the building where you live, you can claim the amount of your expenses that relate to the rented part of the building. You have to divide the expenses that relate to the whole property between your personal part and the rented part. You can split the expenses using square metres or the number of rooms you are renting in the building, as long as the split is reasonable.
Capital Cost Allowance
You can claim depreciation on the original capital cost of the building and subsequent improvements. However, if your rental property is also your principal residence (for example, a basement suite in a house) then it is advisable not to claim capital cost allowance because of specific rules for the principal residence capital gain deduction. Always consult your accountant before claiming capital cost allowance.
Keep detailed records of all the rental income you earn and the expenses you incur. You have to support your purchases and operating expenses with:
. • invoices;
. • receipts;
. • contracts; or
• other supporting documents.
You have a rental loss if your rental expenses are more than your gross rental income. If you incur the expenses to earn income, you can deduct your rental loss against your other sources of income. Your rental operation will make a profit if the rent you charge is enough to cover your usual rental expenses. If the rent you charge is consistently not enough to cover your usual expenses, then Canada Customs and Revenue Agency (“CCRA”) may not consider you to be renting with a profit motive, and you cannot deduct the resulting loss. This rule also applies if you decide to rent part of your home but the rent you charge is not enough to cover your usual rental expenses for that part.
It is important that you consult your Chartered Accountant to prepare your tax return if you own a rental property. Without proper planning, you may owe significant taxes on the property if you choose to sell it in the future.
The interest on a revenue property is 100% tax deductible. There is no income tax advantage to using a secured line of credit over a mortgage. The overall income tax result is the same. It may actually work better when using a mortgage (ignoring the potential difference in interest rates of course) as the link between the loan and what you used the money for is more obvious. In the case where you have a line of credit that goes up and down constantly, you can run into problems trying to prove that all these draws on the line of credit went into the revenue property. In cases where you cannot prove this, not all of the interest expense will be deductible. It is advisable to consult with your mortgage planner/broker for advice on your options when it comes to the best financing strategy.
In a case where somebody buys the property with 5% down and declares it as a principal residence, but does not end up occupying that property, they must report the rental revenue and therefore, they can still claim the expenses. When it comes to income tax, it’s always a matter of fact as to what actually happened. CCRA doesn’t care what assertions have been made to others, they just want to know the reality of what’s going on.