Of the few tricky situations you’ll encounter as a new landlord, investor, or partner in the ownership of rental property(s) or a corporation holding the same is how to navigate around taxation. Figuring out tax on rental income for the very first time can be an overwhelming experience.
Consider this situation: You bought an apartment and lived in it for a couple of years. Then you met a friend who later became your partner. You later moved in together but in a new house.
Because the property market seemed to be doing well, you decided to rent out your former dwelling.
Now, it’s tax time and, as a private landlord, you are wondering: “Do I need to report the income I get from the property on my tax returns? Are there any deductions to be made while doing the same?”
Does that sound familiar or relatable? If yes, we’ve got you covered. Tax law is complicated, and you need a hand to figure it out.
Below, you will learn more about tax on rental income in Canada, from whether rental income is taxable and the tax impact of your rental property to what you need to file, the deductions, and a lot more.
Is Income Tax for Rental Property in Canada?
Yes, income from your rental property(s) is taxable, but not all of it. As you will see later, you can reduce your taxable rental income by deducting specific expenses, like those you incur to get the rental property ready to rent or whilst renting out the property.
When Do I Submit Tax on Rental Income?
Generally, you are supposed to report all income on your tax returns for the year you receive it. For example, if you collect the rent for January 2020 in December 2019, you have it report it as income on your tax returns for 2019.
Similarly, when you get a deposit for the first and last month’s rent, it must be taxed in the year you receive it. However, if you plan to return the security deposit to the tenant at the end of a lease, don’t include it as income.
In the event the tenant presents you with goods and services in exchange for the rent, you have to report their value as rental income when submitting tax returns for the year you received them.
Income received constructively, say, a tenant places the check for January 2020 in your mailbox late in December 2019, must be reported as rental income for 2019. You can’t evade reporting it by allowing the check to overstay in your mailbox until the following year.
The Tax Impact of Your Rental Property
Tax consequences vary depending on who owns the rental property. Normally, rental property can be acquired in three ways:
- In a partnership
- In a corporation
First off, understand that your rental property is classified as a sole proprietorship if you own and personally manage it.
Therefore, as a self-managing landlord, your property isn’t viewed as a separate legal entity. This means it will be taxed based on your personal income. As expected, the amount you will be required to pay will depend on your applicable marginal tax rate.
Procedurally, you’ll have to submit a Statement of Real Estate Earnings (Form T776) for every rental property you personally own. This form gives a summary of your rental revenues and deductions and helps to compute the taxable income to be featured on your personal tax returns.
If you have revenue from managing properties, you will have to file a Statement of Business or Professional Activities ( Form T2125) document, which tallies your Toronto property management income. Because they are required for income tax purposes, make sure all your receipts are kept well and easily available.
If you and your friend(s) or family member(s) joined forces to acquire a rental property(s), Canada Revenue Authority (CRA) considers you as co-owners and your business a partnership (once co-ownership is established). Like a sole proprietorship, a partnership isn’t a separate legal entity, meaning no separate tax return is required.
Normally, the partnership rental income is shared among the partners, based on a ratio set out in the partnership agreement. As a partner, you have to incorporate your respective share of the rental income in your personal income.
You may be required to submit a Statement of Partnership Income (T5013) based on revenues and a host of other criteria. Everything you need to know about the rental income tax rate at the partnership level can be found in Section 96 (1) of the Income Tax Act.
3. A Trust/Cooperation
If the rental property belongs to a corporation, you’ll have to consider multiple aspects when you want to determine the rental income tax rate in Canada. Unlike the other two, a corporation is a separate legal entity. The tenant pays the business, and the business is, thus, responsible for the taxes.
The corporate tax rate comprises both the federal tax and provincial tax. The federal rate is 38% and is applicable in all provinces. However, the provincial tax varies from province to province. The provincial tax on rental income in Ontario, for example, is 11.50%.
However, these rates aren’t applicable to all corporations because both the federal and provincial governments offer tax breaks. The setup of your corporation will determine the corporate tax rate and the tax credits it will qualify for.
Since retained earnings (the funds that remain after the corporation pays taxes) are distributed as dividends to the shareholders, this will count as personal income and each shareholder will be taxed depending on their marginal tax rate.
To avoid double taxation, the tax rate is usually reduced where dividends are paid to shareholders.
If you are not sure how to go about this, arrange to speak with a professional tax accountant or a property management company in Toronto. Special rules may be able to be applied to your business, so you want to get extra eyes on your setup.
Generally, when acquiring rental property(s), always take note of the fact that you can utilize different structures and that each has its benefits and drawbacks. Determining what structure will work for you will depend on your situation as an investor.
What Rate is Rental Income Taxed at in Canada?
The tax rate used on rental income in Canada is going to depend on:
What Expenses Can I Deduct?
There are a couple of things you are allowed to deduct from your rental income for taxation purposes. In addition to what we mentioned earlier, the costs you incur to manage and maintain your rental property are also deductible. This applies even if the property(s) in question is temporarily vacant.
Some of the deductible expenses include:
- General cleaning and maintenance
- Advertising costs
- Local property taxes
- Mortgage interests
- Insurance premiums
- Management fees and office expenses
- Specific travel/vehicle expenses
- Garbage removal fees
In addition to this list being comprehensive, it’s quite challenging to track everything all year round. From when you first look at rental real estate to when you are actually renting it out, there are a lot of things to keep track of.
Most landlords and corporations, therefore, opt to outsource the work to a tax accountant as they are conversant with the entire process.
That aside, you’ll still require the help of an accountant in classifying your expenses as required by CRA, calculating depreciation, computing losses, navigating around the rental income tax calculator in Canada, plus other aspects of the accounting process.
If you have a vacation or second home that you rent out once in a while, that also has to be factored in your tax obligation.
FAQs About Tax on Rental Income
Do I Need to Pay Income Tax on Rental Income?
If you own your properties in a sole proprietorship or with partners, you will need to pay income tax on your rental income in the same way you would pay income tax at your usual tax bracket. Not paying this tax could lead you to trouble, so it should be paid.
How Much Rent Income is Tax Free?
Generally speaking, no rental income is tax free in Canada because it is taxed according to how you have structured the ownership of the business. In some cases, some of your rental income will end up being tax free because of the deductions placed against it by other costs of operation, but the rental income itself is never considered to be tax free.
How Do I Avoid Paying Tax on Rental Income?
While it is illegal to avoid or skip paying taxes on rental income without cause, it is possible to use tax credits for your business as well as legal deductions to lower the tax burden you or your business faces.
The best way to ensure your business is properly organized to keep your tax rates as low as possible is to work with a CPA year-round. Choose a CPA that is familiar with real estate tax laws to ensure you are working with a specialist who can truly make a difference in your business.
Do You Have to Pay Taxes on Rental Income?
Yes; taxes must be paid on rental income. In some cases, deductions and tax credits will balance out the amount of tax that is owed on rental income, but it is necessary to report all rental income as income when you are filing your taxes.
How Do You File Taxes On Rental Income?
If you are the sole-proprietor of your rental property, the tax rate for all rental income will be the same as your personal marginal tax rate. If you own properties in partnership with others, the income will be split between you all, and each person will pay on that income at their applicable tax rate.
Individuals filing their taxes on rental income should use this form.
If the properties are held through a business, the tax rate will depend on the location of the business and what type of business it is. The national tax rate for rental income is a federal rate of 38%, and each province has its own tax rate as well.
Is Rental Income Considered Other Income?
In most cases, rental income is considered to be personal, other income when filing your taxes in Canada. If you are collecting rental income through a business or through property management, however, the money should be considered to be self-employment income rather than other income.
Is Rental Income a Good Investment?
When managed properly, rental income is a great investment. Choosing profitable properties and managing them effectively can easily bring you a consistent ROI without the volatility of the stock market. The results of your investment, however, are always going to depend on your management skills as well as the health of the rental market each year.
Depending on how you structure the business, real estate investing can often become a form of long-term passive income.
Can You Make a Living Off Of Rental Properties?
It is possible to make a living off of rental properties if you own enough properties that are making net profits each month and are being managed successfully. Before deciding to drop all other jobs, however, make sure your business is set up with windfall accounts to ensure you will be able to live off the income without interruption.
Even though there are a few more things to learn about tax on rental income in Canada, this guide should give you a great introduction to what you need to know as a property owner or manager. It can act as your foundation on matters related to rental income tax.
Remember, ownership of the rental property plays a huge role in deciding how you are going to file rental income tax. If you are yet to figure everything out clearly, you can always seek the help of a tax accountant or a professional property management company.
In addition to offering proper guidance, a good property management company will also help you to secure your family wealth for generations to come and create more wealth. And if you are a landlord, they can help you screen potential tenants and ensure you get the best tenants who will submit their rental income on time for taxation purposes.