Taxes of Rental Properties
Residential vs Commercial
First thing to know is that residential properties are not charged GST, so somebody who buys a residential property does not have to register for a GST number. Commercial properties however are charged GST and so owners would have to collect GST and keep track of the various credits which they can claim.
A list of common deductible rental expenses:
Interest on mortgage (not principal)
Utilities (Hydro, water, heat, cable etc.)
Property taxes (Municipal, school tax)
Accounting, legal fees
Property management fees
Condo fees if applicable
Repair and maintenance costs
Depreciation (Cannot create or increase loss with this. Will result in more tax upon sale)
Capitalize or Expense?
Some expenditures are treated as a capital expenditure while some are treated as repairs. Repairs can be deducted, decreasing taxes, while capital expenditures may not be deducted and must be added to increase the cost base or value of the house. This will result in claiming higher depreciation and paying lower capital gains tax upon sale.
So how do I know which one it is?
Capital expenditure is defined as something that provides improvement, rather than just fixing what needs to be fixed. Capital assets are usually better quality and of an enduring nature. Examples might be a new fridge, stove or changing wooden steps for concrete ones. Repairs are usually more periodic and just result in maintaining the status quo nature of the property. Examples might be plumbing, painting, replacing a roof or steps with similar materials. A professional should be consulted to make sure.
If you need to drive to the property to fix something, you may deduct car expenses for transporting tools and materials and should keep receipts and a log of km driven. You cannot claim car expenses for collecting rent however. If you own multiple properties, you may claim also for collecting rent, as well as managing and supervising repairs.
Capital cost allowance (CCA) is the depreciation that the CRA allows property owners to deduct. It can be claimed to reduce income, but not to create or increase a loss.
The upside is that it reduces taxes, but the downside is that when you want to sell your property you have to pay tax on something called Recapture, which is to make up for all the depreciation you claimed. This is in addition to the capital gains tax you will have to pay. A professional should be consulted to determine if it is advantageous to claim CCA in your situation.
If a tenant is not paying their rent, this could be deducted as a loss. You need document proof that the tenant refused to pay and if they end up paying, it has to be added to income when received.
The T776 is the statement of real estate rentals which should be filled by a property owner.
For Quebec taxpayers: The RL-31 slip must be filed and copies given to tenants.
Building and Land
When a building and land are purchased, part of the cost is allocated to the land and part to the building. The allocation has tax implications, as the more allocated to the building, the more Recapture tax the seller has to pay, while the more depreciation the buyer can claim.
Carrying charges (interest and property taxes) cannot be deducted from vacant properties unless income is being made from it (perhaps as a parking lot). In this case, the expenses to be deducted are limited to the income generated and any excess must be added to the cost rather than deducted. A professional should be consulted.
As always, it is very important to keep document proof of all expenses claimed, as property owners are more likely to be audited.
While this is an overview of the basics of property ownership tax implications, each situation may be different and so a professional should be consulted for specific decision making.