Whether you’re a real estate mogul or just getting started with your first rental unit, if you’re receiving money for rent, your silent investor needs his cut paid. Never heard of this silent investor? We’re talking about Canada Revenue Agency (CRA) and they always get their share through taxes.
The good news is that there’s many different tax rebates and deductions that can help you reduce how much tax you have to pay. In this article, we’ll cover tax rebates most landlords don’t claim but should. Because after all, who doesn’t want a bigger yearly tax return?
Who Is This Article For?
Before we get started, this article was written for the beginner landlord. To make it more specific; the unincorporated landlord who owns one or more properties for the purposes of generating income that isn’t operating a rental business.
The reason we’re focusing on unincorporated landlords is that rental corporations and businesses file their tax returns completely differently. They’re also entitled to different tax rebates and incentives.
Why Report Rental Income?
Even if you’re renting out an illegal basement suite for a few hundred a month, report the rental income. You never know when or why your tenant will report you to CRA, or worse if you eventually get randomly audited.
The consequences of not reporting aren’t worth the benefits of dodging CRA. First off, the late fees and penalties are significant and retroactive. That means if they catch something fishy from 5 years ago, you’ll pay a penalty, then interest on that penalty and anything you owe them… Oh, and compounded over 5 years. Second, expenses associated to running the property are deductible expenses. Depending on your tax bracket, you may be able to get money back from CRA or even declare a loss.
In the carrot versus the stick scenario (the stick being penalties, fines, interest, seizures and maybe even prison time) doesn’t it make more sense to go with the carrot?
Basic Tax Deductions for Landlords
Did you know there are rental expenses you can deduct that go far beyond your latest purchase at Home Depot? These are categorized by CRA as “current expenses” since they are recurring (their opposite are “capital expenses”). Over the course of a year, they can add up to a substantial amount and get you a nice return:
Advertising Fees: any expense that was related to promoting your rental, such as a spot in the local paper, internet listing service, even an orange sign you stuck in the rental’s window counts.
Repairs and Maintenance: any small repair to the property. Major renovations can be deducted as capital expenses. CRA provides a handy comparison table to understand the difference. Note: if you’re thinking of claiming capital expenses, please consult with a professional accountant or tax specialist as there are implications that go beyond tax deductions.
Management Fees: if you’re paying a company to take care of your rental, their services can be counted as an expense.
Utilities: are you paying hydro, gas, water or even the internet for the unit? If so, those can be deducted. Just be careful that if you live in the same property as your tenant, you can only claim a percentage of that expense (more on that later).
Tax Deductions Most Landlords Don’t Claim
So far so good? Those were the basic deductions you can claim. However, if you want an even bigger return next year, look at some of these deductions:
Mortgage Interest: assuming you have a mortgage on the property, you can deduct the interest payments (note: you’re not allowed to claim principal payments on the mortgage as expenses). When you consider that yearly interest on a $200,000 mortgage at 3% over 20 years is somewhere around $6,000, that’s a hefty deduction.
Condo Fees: if your rental is a condo or strata and you pay upkeep fees to the corporation every month, you can claim most of them at year-end.
Property Taxes: CRA lets you claim municipal taxes from your rental income. One taxman takes money from you, the other gives it back. Efficient government at its best.
Insurance on the Rental: yet another recurring expense related to the maintenance and upkeep of your rental.
Examples are always a great way to highlight the significance of these typically unclaimed tax deductions. Let’s say you purchased a $175,000 micro-condo in Montreal’s Plateau:
Mortgage Interest: $4,300 (on $146,000 at 3% over 20 years)
Condo Fees: $1,800 ($150 monthly)
Property Taxes: $2,000
Insurance: $360 ($30 monthly)
Total Deductions: $8,460
That’s a significant loss to claim with CRA!
Tricky Deductions and Expenses You Can’t Claim
New Residential Property Rebate (the holy grail of tax deductions):. if you bought a new property (or made significant alterations to one) for the sole purposes of renting it out, you can get a GST/HST rebate. There are a few strings attached to it, such as landlord can’t be living in the unit. However, it’s so impactful at tax return time that the NRPR makes it possible for some investors to use the return on the first property and use it as a down payment on a second, then rinse and repeat.
Motor Vehicle and Travel Expenses (a tricky one that can land you in trouble): you can claim gas, wear on your vehicle (or the lease) and any other travel expenses so long as they are related to your rental. In other words, you can’t claim your personal use of the vehicle’s expenses. Most landlords choose to forego this expense for the simple reason that it’s a hassle to keep track of. It’s best to consult with a professional before claiming this.
Land Transfer Taxes (a deduction you can’t claim): CRA is explicitly clear that landlords cannot claim this deduction. While unfortunate, landlords must consider part of the purchase of the property. Part of this expense is calculated in capital cost allowances (CCA), but these require the help of tax experts to determine eligibility.
Deductions You Need Expert Advice Before Claiming
There are a few more tax-saving strategies you can claim but because they’re case-specific to each household and can get you in trouble with CRA if not properly implemented, we recommend you consult with a tax specialist. That said, if you end up implementing them, they can end up being worth the trouble:
Income Splitting With Lower Earners: If a spouse, relative or associate is active in the rental property, you may be able to treat the investment as a partnership rather than a sole proprietorship. That means you can spread some of the income from the highest to lowest earners which reduces the overall tax burden of the household.
Here’s the catch: you need to be able to show CRA that the person receiving the income was active in the business. That doesn’t mean you need a picture of your spouse clearing that clog on Christmas Eve at 4AM. Actions like bookkeeping, showing the rental to prospective tenants, dealing with listings, etc these all count as active involvement. Consult with your specialist and claim reasonable amounts.
Legal and Professional Fees: An often overlooked strategy in a landlord’s toolbelt is paying a lawyer a one-time fee to review and/or draw up leases. This not only saves you a lot of time but the small fee charged is a tax deduction.
The same concept applies to accountants. Why go through the hassle and time-consuming process of filing taxes yourself (and likely making a mistake) when you can pay a specialist to do it? The accountant’s fee becomes a tax deduction for next year.
Deductions For Whole Versus Partial Properties
With all those tax deductions mentioned above, remember that if you’re renting a portion of the property you can only claim a percentage of those expenses. For example, if your basement rental suite is ⅓ the square footage of your property, then you can only claim ⅓ of the hydro, mortgage interest, property taxes, etc.
Wrapping This Up
As you can see, tax deductions and incentives go much further than renovation and utility expenses and can end up in a hefty tax return. If you’re ever unsure about what you can, can’t or should claim, consult with a tax specialist (that’s a deduction too!).