It's important to understand the implications of purchasing a rental home and how that affects your taxes. There are some things that you don't want to miss just because you're new to the game - let us break it down for you.
Property vs. Business Income
If you’re a landlord, your rental income will be treated either as property income or business income, and each brings different tax implications to the table. According to the CRA, to differentiate between these two, you should consider the numbers and services that you offer to your tenants.
Most often, you're collecting property income if you only provide basic services such as heat, parking, light, laundry facilities. If you offer more services such as cleaning, meals, or security, your rental operation is likely a business, and could be taxed as such.
Keep in mind that the more services you provide to your tenants, the higher the chances it will be considered a rental business.
Why Property and Business Income Matters
As mentioned, there can be significant differences in your taxation, such as:
Not subject to Canada Pension Plan premiums (CPP) on net income.
Filing deadline: April 30th
Deductions Such as Childcare Expenses Deduction, Canada Workers Benefit (CWB), or Refundable Medical Expense Supplement do not apply.
Subject to CPP premiums
Filing deadline: June 15th - for the individual and their spouse - although any taxes payable are still due by April 30th.
All the following apply for deduction:
Childcare Expenses Deduction
Working income tax benefit (WITB)
Refundable Medical Expense Supplement
How co-owning or partnering can affect your taxes
Entering into a partnership or co-ownership on a rental property naturally comes with a lot of advantages. There’s less overhead for each individual, other costs can be easily shared, and often times your purchasing power will be increased. However, a joint proprietorship also directly affects the way you should file your taxes.
Personal: You’re the sole owner, which makes it nice and simple for you to file your taxes by claiming all the rental income.
Co-ownership: As mentioned by CRA, “if you own the rental property with one or more persons, we consider you to be a co-owner.” That means that if you share a rental property with your spouse or common-law partner, you are co-owners.
Each co-owner claims their share of the rental income according to what they've previously agreed. As co-owners, it's vital to understand the details of your partnership for income tax purposes - it helps define if you have a property income or a business income.
Partnership: In short, it's profit-oriented. CRA defines partnership as “ a relationship between two or more people carrying on a business, with or without a written agreement, to make a profit. If there is no business in common, there is no partnership.”
One other important note: According to Canada Revenue Services, if you’ve received income from renting a property, you have to file a statement of income and expenses. Luckily, the always handy Form T776 will help you calculate them.
Hopefully, this quick overview of tax considerations helps you plan for your property renting future. Now to the fun part: Expense deductions!
What Are Current and Capital Expenses
Who doesn’t love a taxable deduction? However, it’s important to know that not all expenses for your rental property are created equal. There are two basic types of expenses that you typically incur as you earn a rental income: Current expenses (also called operating expenses) are expenses that serve a short-term benefit. For example, spending money on repairs to keep part of the rental unit in good working condition is considered to be a current expense.
On the other hand, capital expenses are typically related to things that provide long-term value. The costs incurred to buy or improve your property as a whole fall into this category. Normally, you cannot deduct the sum of these expenses in the year you incur them - instead, you get to deduct their amount over several years as Capital Cost Allowance (or CCA for short).
Deductible Rental Expenses
As stated by Canada Revenue Service, you can deduct expenses you incur to obtain rental income. To be more specific, here’s a list of deductible expenses along with links to learn more about each category.
We realize it’s quite an extensive list. The truth is, it can be challenging to keep track of every expense, repair, legal fees, bank charges, and utilities. Staying on top of these things comes with the landlord territory. While it’s certainly possible to manage and track these expenses yourself to save a bit of money, it’s very common for property owners to delegate it to a certified accountant to ensure they meet all the tax requirements (and get the maximum bang for their deduction buck).
You might want to pay special attention to maintenance and repair expenses, as they make it possible for you to deduct amounts paid to a property management company, as well as agents for collecting rent or finding new tenants.
While the list of deductible expenses is long, non-deductible ones are a bit easier to understand. They typically fall into one of five categories:
Though they aren’t deductible, you’ll still need the help of an accountant to calculate your expenses as required by the CRA.
Calculating loss, depreciation, advertising costs, and other fees can definitely pile up, so keeping everything in order makes it easier for you when tax season comes around.
You may already know this, but records refer to every accounting and financial information document that you accumulate over the course of your property rental business. The CRA advises that you keep them “for six years from the end of the tax year to which they relate.''
Records that you should keep to support your current expenses and purchases include:
Any document that may support an expense
You don’t have to send in all records with your income tax filing - just keep them organized by year and subject in case the CRA does ask for them to validate your claim.