You probably own one or several rental properties in Canada or rent out a few rooms in your home. At the end of the month, you usually expect some rental income, and come tax time, the authorities expect you to declare all of it.
Now you might be wondering, “Do I have to report all that rental income I earn from my property on my tax returns? And, can I make any deductions from it? “
To answer you briefly, yes, your rental income is taxable and, thankfully, there are a number of expenses you are allowed to deduct from it for taxation purposes.
Later on in the article, we’ll be taking a closer look at each of these rental property tax deductions in Canada. But for now, it would be best if you first understand the difference the two major types of expenses recognized by the Canadian Revenue Agency (CRA).
Basic Types of Expenses
The CRA specifies not only the expenses that can be deducted from your rental income but also when, specifically the year in which they can be deducted. As you will realize shortly, some expenses are only acceptable as a deduction in the year you incur them while others are deductible in future years.
Current expenses fall in the first category. The latter is referred to as capital expenses. Generally speaking, a current expense reoccurs after a short period. An example provided by the CRA is the cost you incur to paint the exterior of your wooden property.
Capital expenses, on the other hand, offer a lasting advantage or benefit. The CRA defines them as “renovations and expenses that extend the useful life of your property or improve it beyond its original condition”. Placing vinyl siding on the exterior walls of your wooden property, for instance, is a capital expense.
Here are the questions the agency uses to determine whether an expense is a capital or current expense:
- Does the expense offer a lasting advantage?
- Does the expense improve or maintain the property?
- Is the expense for a separate asset or just a part of the property?
- Is the expense incurred in repairing the used property you acquired for the purpose of placing it in a suitable condition for use?
- Is the expense incurred in repairing an asset made for the purpose of selling it?
- What is the value of the expense?
Is that all? Definitely not. There’s a lot more about these expenses you can learn from the Agency’s platform, including how to judge an expense in light of the questions we’ve mentioned.
Next, let’s learn more about the rules of tax on rental income allowable expenses together with other information you need to know as a landlord.
Below is a list of rental property tax deductions in Canada that you can go ahead and claim right now. This should be done on Form T776.
If you advertized your rental property on magazines, newspapers, websites, and other similar places, go ahead and claim a tax deduction for all the fees you paid towards the same. Claim all the advertising expenses because all of them are directly related to your property.
Is your property(s) insured? Did you pay any insurance premiums towards its coverage? If your answer is yes to both questions, the CRA allows you to make a deduction of what you’ve incurred during the year. But you have to limit your deduction to coverage expenses incurred during the year.
In the event your premiums offer coverage for more than one year, you are only allowed to less the expenses in the year that they offer coverage for.
Make a full claim if you rented out your entire property. If the rented unit is part of your principal residence, just claim the portion of the amount.
Under interests, there’s a variety of costs you can claim. Top on the list is the interest incurred from the mortgage you borrowed to finance the buying of your rental property. Not forgetting to mention all the fees charged when obtaining a mortgage, like the legal fees, mortgage application, appraisal, and so on. Leave out the mortgage principal as it’s not deductible.
Funds you borrowed to finance improvements to your property can also be deducted. However, it must be a soft cost, which the CRA defines as any fund you borrow for the sake of financing construction, upgrades, and renovations to your rental property with the aim of making it more suitable.
Professional Fees (Legal And Accounting Fees Included)
The fee incurred in hiring different types of professionals to work for you is deductible as well. Examples include attorney fees (for preparing leases, collecting overdue rents, etc.), accountant fees (for bookkeeping, auditing, preparing financial statements etc.), and consultancy fees. Generally, you can deduct the professional fees incurred for the sake of running your rental operations.
However, legal expenses incurred to purchase a rental property can’t be deducted from the gross rental income; rather, split them between building and land, then add both to the specific costs they belong to.
Repairs, Maintenance & Improvements
Expenses of normal repairs, like the cost of fixing a broken door or window, painting, and the like count as current expenses and can, therefore, be deducted in the year you incurred them.
Improvements, on the other hand, especially those done to your business assets, ought to be capitalized if:
- They add value to the asset in question, or
- To a noticeable degree, extend the duration you can use the asset, or
- Adapt the asset to a totally different use.
Improvements mostly cover real estate and are largely seen as adding value to your property. It could be the new electrical wiring, lighting, or plumping that you put up or the project you undertook to rebuild your business equipment.
Thus, improvements can’t be deducted in the year they were incurred.
Management and Administration Fees
This category covers the amounts you paid a company or an individual to manage your rental property. Other fees that also fall into this category include what you paid or is payable to real estate agents for finding new tenants or collecting rets.
Motor Vehicle Expenses
Deductions of motor vehicle expenses are done based on how many properties you own. For example, if you own a single rental property, you can go ahead and deduct specific motor expenses, but if only certain conditions are met. However, those expenses you incur to collect rents aren’t deductible, unless you cover more than one property. More about this category can be found on the agency’s website.
Just as the name suggests, offices expenses include the cost of buying items such as pens, paper, pencils, stamps, stationery, and the like.
Your province will determine how much you will pay as property taxes and then your municipality will collect the amount. Tax rules allow you to go ahead and subtract the property taxes your municipality has charged you in the current financial year. Remember to only claim the portion related directly to your property.
For instance, if you have a principal residence plus a basement apartment that you rent out, you can claim a percentage of the amount that is equivalent to the square footage the rented unit occupies.
As a landlord, you are allowed to less from your rental income specific travel expenses (both local and long distance) that relate to your business. Commuting expenses, say travelling from work to home or vice versa, aren’t included.
In the event you have your own automobile, you can make the deduction using two methods. First one is the mileage rate. The other is by taking off the expenses incurred, such as gasoline, repair, and maintenance. Other expenses such as parking fees, tolls, interest on your car loan, applicable registration fees, license costs, taxes can also be deducted.
If you don’t own a vehicle, you are allowed to deduct all the public transportation expenses you’ve incurred that are business related.
These are expenses you pay way ahead of their time. You can, therefore, go ahead and claim any prepaid expenses you make in the year or the years you get the attached advantage.
Utilities, no doubt, take a huge portion of the expenses you incur as a landlord. Thankfully, you can make a claim on your tax return for the utilities that are related to your property. That means you can only make a full claim if you rent out the entire property and a portion if only a part of your property is rented out. Utilities could be things like water, heat, cable, hydro, and the like.
Other rental expenses such as landscaping costs, condominium fees, vacant land, lease cancellation payments are deductible but each is subject to unique conditions.
As you take note of these deductible expenses for rental property, it would also be great to have a look at the specific expenses that the Agency says you can’t deduct from your rental income. That includes things like penalties, land transfer tax, the value of your own labour, and many others. Don’t forget to claim the whole amount if you rented out your entire property but only a small portion in the event the rented unit is part of your principal residence.
Feeling stuck or in need of help? A qualified and reputable investment consultant or a property management company would be the first option; begin with as their knowledge as their experience enables them to thrive in this area.