Do you own an investment property in Canada? If you are, this article is for you!
Renting out a property is a lucrative venture if done well. You earn a passive rental income at the end of every month, among other benefits. Being a landlord, however, isn’t without responsibilities, and a key one is being taxed compliant.
The Canada Revenue Agency expects landlords to declare all rental income when filing their tax returns come tax time. T means the question remains:
- Do you know what exactly counts as rental income?
- Do you know what deductions you qualify for?
- Do you know the tax implications of things like capital expenditures, capital expenses, mortgage interest and insurance, house insurance, and other deductible expenses like repairs to adhere to safety standards?
In this article, we’ll help you answer all these questions and more.
What is the Difference Between a Current Expense and a Capital Expense?
Broadly speaking, a current expense is one that reoccurs every so often. A good example of a current expense is the cost of repainting your rental unit. Other costs include those you may incur to maintain or repair your rental unit.
On the other hand, a capital expenditure is one that doesn’t reoccur often. According to the Canada Revenue Agency (CRA), these are ones that help improve the fair market value of a property. They are upgrades or renovations that help extend a property’s useful life or replace faulty features or equipment.
An example of capital expenditure is installing vinyl siding on the outside of your wooden rental property.
In order to determine whether an expenditure is a current or capital expense, the CRA uses the following questions.
- Does the upgrade or renovation offer the investment property a lasting advantage in regards to its selling price or market value?
- Is the upgrade meant to maintain the property or improve its fair market value?
- Is the expense meant for a separate asset or is part of the investment property?
- Is the expense meant to repair the property or for the purpose of improving its desirability?
- Is the repair expense meant to boost the property’s value or selling price and then sell it?
- How much is the expense incurred?
You can learn more about the two categories of expenses from the Canada Revenue Agency’s platform.
Why Does the Type of Expense Matter?
As a landlord, knowing which category an expense falls into is crucial when it comes to taking advantage of deductible expenses. For current expenses, they only apply for the current year in which they occur.
On the other hand, a capital expense requires that it be divided in a specific way and be applied over a couple of years’ taxes. The outcome of this would be unique to you, so for further information, it’s best to contact an accountant, property management company, or financial professional.
What Type of Expenses is Tax Deductible in Canada?
The following is a list of deductible expenses that landlords in Canada can claim. You must do this on a special form (Form T776) when filling out your personal tax returns.
- Office Expenses. Examples of these expenses include the cost of purchasing pencils, paper, pens, stationery, stamps, and so on. You can only apply these expenses if you made the purchases for business use only.
- Motor Vehicle Expenses. You can make deductions on motor vehicle expenses based on the number of rentals you own.
- Management fees. This applies to property owners who have hired professionals to manage their investments on their behalf. Payments that also fall under this category include expenses incurred in regard to real estate agents.
- Repairs, Maintenance & Improvements. These include costs incurred in repainting or fixing a broken door. As these are current expenses, you can make the deductions for the year in which you incur them.
- Professional Fees. The CRA also allows landlords to make deductions on any professional fees incurred. Examples of these include legal fees, property management fees, and consultancy fees.
- Any improvements you make cannot be deducted for the year in which you incur them. You must spread the cost over a couple of years’ tax. Examples of capital expenditures include new lighting, electrical wiring, or plumbing.
- You cannot, however, make deductions for legal expenses incurred when buying a rental property from the gross rental income. Rather, you must split them up between land and building, then sum them up to the specific expenses they belong to.
- You can claim a variety of costs under interest. Chief on the list is mortgage interest. You can also deduct all other costs you incur when obtaining the mortgage, such as appraisal, mortgage application, legal fees, and so on. Mortgage principal isn’t deductible, however.
- Do you pay any insurance premiums towards covering your investment property? If you do, you may be able to qualify for deductions on expenses you’ve incurred on building insurance during the year.
- Have you advertised your property on websites, newspapers, magazines, and other similar places? If you have, you may be able to claim a tax deduction for all the payments made for it.
- Property Taxes. Each province determines how much tax landlords must pay. The CRA allows you to then go ahead and minus the property taxes levied by your province in the current financial year.
Other expenses that qualify for tax deduction under the CRA include travel costs, prepared expenses, utility costs, as well as other rental expenses such as condominium fees, landscaping costs, lease cancellation payments, and vacant land.
It’s always a good idea to run any expenses you’re unsure about past an accountant or property management company to avoid any landlord mistakes.
Tax season requires all landlords to abide by the requirements made by the Canada Revenue Agency. If you are just starting out, enlisting the help of an expert can be a great idea. Real Canadian Property Management Solutions is a trusted property management company in Grande Prairie, Alberta.