{"id":424,"date":"2018-08-09T18:39:06","date_gmt":"2018-08-09T18:39:06","guid":{"rendered":"https:\/\/rentals.ca\/blog\/?p=424"},"modified":"2018-08-20T16:16:47","modified_gmt":"2018-08-20T16:16:47","slug":"tax-deductions-most-landlords-dont-claim-but-should","status":"publish","type":"post","link":"https:\/\/rentals.ca\/blog\/tax-deductions-most-landlords-dont-claim-but-should","title":{"rendered":"9 Tax Deductions Most Landlords Don\u2019t Claim But Should"},"content":{"rendered":"

Whether you\u2019re a real estate mogul or just getting started with your first rental unit, if you\u2019re receiving money for rent, your silent investor needs his cut paid. \u00a0Never heard of this silent investor? We\u2019re talking about Canada Revenue Agency (CRA) and they always get their share through taxes.<\/span><\/p>\n

The good news is that there\u2019s many different tax rebates and deductions that can help you reduce how much tax you have to pay. \u00a0In this article, we\u2019ll cover tax rebates most landlords don\u2019t claim but should. Because after all, who doesn\u2019t want a bigger yearly tax return?<\/span><\/p>\n

Who Is This Article For?<\/span><\/h2>\n

Before we get started, this article was written for the beginner landlord. \u00a0To make it more specific; the <\/span>unincorporated <\/span><\/i>landlord who owns one or more properties for the purposes of generating income that isn\u2019t operating a <\/span>rental business.<\/span><\/i><\/p>\n

The reason we\u2019re focusing on <\/span>unincorporated <\/span><\/i>landlords is that rental corporations and businesses file their tax returns completely differently. \u00a0They\u2019re also entitled to different tax rebates and incentives.<\/span><\/p>\n

Why Report Rental Income?<\/span><\/h2>\n

Even if you\u2019re renting out an illegal basement suite for a few hundred a month, <\/span>report the rental income<\/span>. \u00a0You never know when or why your tenant will report you to CRA, or worse if you eventually get randomly audited.<\/span><\/p>\n

The consequences of not reporting aren\u2019t worth the benefits of dodging CRA. \u00a0First off, the late fees and penalties are significant and retroactive. That means if they catch something fishy from 5 years ago, you\u2019ll pay a penalty, then interest on that penalty and anything you owe them\u2026 Oh, and compounded over 5 years. \u00a0Second, 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.<\/span><\/p>\n

In the carrot versus the stick scenario (the stick being <\/span>penalties, fines, interest, seizures and maybe even prison time<\/span><\/a>) doesn\u2019t it make more sense to go with the carrot?<\/span><\/p>\n

Basic Tax Deductions for Landlords <\/span><\/h2>\n

Did you know there are rental expenses you can deduct that go far beyond your latest purchase at Home Depot? \u00a0These are categorized by CRA as \u201ccurrent expenses\u201d since they are recurring (their opposite are \u201ccapital expenses\u201d). \u00a0Over the course of a year, they can add up to a substantial amount and get you a nice return: <\/span><\/p>\n

Advertising Fees:<\/b> 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\u2019s window counts.<\/span><\/p>\n

Repairs and Maintenance:<\/b> any small repair to the property. \u00a0Major renovations can be deducted as capital expenses. \u00a0CRA provides a handy <\/span>comparison table<\/span><\/a> to understand the difference. \u00a0Note: if you\u2019re thinking of <\/span>claiming capital expenses<\/span><\/a>, please consult with a professional accountant or tax specialist as there are implications that go beyond tax deductions.<\/span><\/p>\n

Management Fees:<\/b> if you\u2019re paying a company to take care of your rental, their services can be counted as an expense.<\/span><\/p>\n

Utilities:<\/b> are you paying hydro, gas, water or even the internet for the unit? \u00a0If 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).<\/span><\/p>\n

Tax Deductions Most Landlords Don\u2019t Claim<\/span><\/h2>\n

So far so good? \u00a0Those were the basic deductions you can claim. \u00a0However, if you want an even bigger return next year, look at some of these deductions: <\/span><\/p>\n

Mortgage Interest: <\/b>assuming you have a mortgage on the property, you can <\/span>deduct the interest payments<\/span><\/a> (note: you\u2019re not allowed to claim principal payments on the mortgage as expenses). \u00a0When you consider that yearly interest on a $200,000 mortgage at 3% over 20 years is somewhere around $6,000, that\u2019s a hefty deduction.<\/span><\/p>\n

Condo Fees:<\/b> 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.<\/span><\/p>\n

Property Taxes: <\/b>CRA lets you claim municipal taxes from your rental income. \u00a0One taxman takes money from you, the other gives it back. Efficient government at its best.<\/span><\/p>\n

Insurance on the Rental: <\/b>yet another recurring expense related to the maintenance and upkeep of your rental.<\/span><\/p>\n

Examples are always a great way to highlight the significance of these typically unclaimed tax deductions. \u00a0Let\u2019s say you purchased a $175,000 micro-condo in Montreal\u2019s Plateau:<\/span><\/p>\n

Mortgage Interest: $4,300 (on $146,000 at 3% over 20 years)<\/span><\/p>\n

Condo Fees: $1,800 ($150 monthly)<\/span><\/p>\n

Property Taxes: $2,000<\/span><\/p>\n

Insurance: $360 ($30 monthly)<\/span><\/p>\n

Total Deductions: $8,460<\/b><\/p>\n

That\u2019s a significant loss to claim with CRA!<\/span><\/p>\n

Tricky Deductions and Expenses You Can\u2019t Claim<\/span><\/h2>\n

New Residential Property Rebate (the holy grail of tax deductions):<\/b>. \u00a0if you bought a new property (or made significant alterations to one) for the sole purposes of renting it out, <\/span>you can get a GST\/HST rebate.<\/span><\/a> \u00a0There are a few strings attached to it, such as landlord can\u2019t be living in the unit. \u00a0However, it\u2019s 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.<\/span><\/p>\n

Motor Vehicle and Travel Expenses (a tricky one that can land you in trouble): <\/b>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. \u00a0In other words, you can\u2019t claim your personal use of the vehicle\u2019s expenses. Most landlords choose to forego this expense for the simple reason that it\u2019s a hassle to keep track of. \u00a0It\u2019s best to consult with a professional before claiming this.<\/span><\/p>\n

Land Transfer Taxes (a deduction you can\u2019t claim): <\/b>CRA is explicitly clear that landlords cannot claim this deduction. \u00a0While unfortunate, landlords must consider part of the purchase of the property. \u00a0Part of this expense is calculated in capital cost allowances (CCA), but these require the help of tax experts to determine eligibility.<\/span><\/p>\n

Deductions You Need Expert Advice Before Claiming<\/span><\/h2>\n

There are a few more tax-saving strategies you can claim but because they\u2019re 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. \u00a0That said, if you end up implementing them, they can end up being worth the trouble: <\/span><\/p>\n

Income Splitting With Lower Earners: <\/b>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. \u00a0That means you can <\/span>spread some of the income<\/span><\/a> from the highest to lowest earners which reduces the overall tax burden of the household.<\/span><\/p>\n

Here\u2019s the catch: you need to be able to show CRA that the person receiving the income was active in the business. \u00a0That doesn\u2019t 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.<\/span><\/p>\n

Legal and Professional Fees: <\/b>An often overlooked strategy in a landlord\u2019s toolbelt is paying a lawyer a one-time fee to review and\/or draw up leases. \u00a0This not only saves you a lot of time but the small fee charged is a tax deduction.<\/span><\/p>\n

The same concept applies to accountants. \u00a0Why 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? \u00a0The accountant\u2019s fee becomes a tax deduction for next year.<\/span><\/p>\n

Deductions For Whole Versus Partial Properties<\/span><\/h2>\n

With all those tax deductions mentioned above, remember that if you\u2019re renting a portion of the property you can only claim a percentage of those expenses. \u00a0For example, if your basement rental suite is \u2153 the square footage of your property, then you can only claim \u2153 of the hydro, mortgage interest, property taxes, etc.<\/span><\/p>\n

Wrapping This Up<\/span><\/h2>\n

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. \u00a0If you\u2019re ever unsure about what you can, can\u2019t or should claim, consult with a tax specialist (that\u2019s a deduction too!).<\/span><\/p>\n

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