It doesn’t matter if you own 1,000 income properties or 10, there is one constant – taxes! When your real estate investments generate an income, you need to report it to Canada Revenue. Whether it’s from renting a room in your home or leasing out one or more houses that you own, all income is taxable.
While established property owners are seasoned pros at figuring out what is taxable on their rental income, it can be a challenge for first-time investors. If you’re just getting your start in real estate investment and are a landlord who is not yet incorporated and owns one or more rental properties, this article is for you. Here’s what you need to know.
1. Stay Above Board
It can be tempting to “forget” about some income but don’t. You risk significant (and retroactive) late fees, penalties and fines when you are eventually, and inevitably, caught. Keep detailed records of all the rental income you earn and the expenses you incur. You have to support your purchases and operating expenses with:
• Invoices
• Receipts
• Contracts
• Supporting documents
2. Take Advantage of ALL Applicable Deductions
There are two types of basic expenses: current and capital. Typically a capital expense delivers a lasting benefit or advantage, such as a new roof, or new energy-efficient windows. Current expenses are generally the cost of maintaining a property, such as painting the interior or making repairs to keep the building in good condition.
Here is a list of common (and not so common!) deductions:
Accounting Fees: You can deduct fees for legal services to prepare leases or collect overdue rents. However, if you incur legal fees to buy your rental property, you cannot deduct them from your gross rental income. Canada Revenue advises you to instead divide the fees between land and building and add them to their respective cost. You can also deduct expenses you had for bookkeeping services, audits of your records and preparing financial statements.
Advertising Costs: If you pay to place ads in various listings or papers, you can deduct this expense. You can also deduct the cost of any signage used to promote your available units.
Cleaning and Maintenance: Keeping the windows clean, clearing snow, landscaping, garbage removal and so forth, are all examples of cleaning and maintenance fees that can be applied toward your taxes.
Insurance Premiums: You can deduct the premiums you pay on your rental property for the current year.
Lease Cancellation Fees: Don’t forget to subtract amounts paid or payable to tenants to cancel their leases.
Management Fees: If you pay a property management company to take care of your investment properties, you can claim these paid or payable fees.
Motor Vehicle Expenses: This one is a little trickier, and if you do claim these expenses on your taxes, ensure that you have all receipts and that you used your car and gas for collecting rent, overseeing repairs or managing the property.
Property Taxes: Canada Revenue allows you to claim building and land property taxes from your rental income.
Rental Losses: When your rental expenses are more than your gross rental income that counts as a rental loss. Canada Revenue says that if you incur the expenses to earn income, you can deduct your rental loss against your other sources of income.
Repairs: Be sure to keep a record of (and deduct!) any repair to the property. Major renovations are deducted as capital expenses.
Utilities: If you pay for Internet, water, heat, etc., these costs can be used to lower your taxes.
3. Remember Any COVID-19 Assistance
Due to the pandemic, you may have received government COVID-19 assistance for your rental income or rental expenses, such as the Canada Emergency Wage Subsidy. You have to either include these amounts in your rental income or reduce your rental expenses by the amounts that you received. You may also have received a government loan. The loan itself is not taxable. However, any part of the loan that is forgivable is taxable in the year in which the loan is received.
4. Not Everything Is Deductible
You cannot deduct fees or costs from penalties, land transfer tax, repayments on the principal of your mortgage, or the value of your own labour/sweat equity.
The Bottom Line
Real estate investment can be a very profitable career, but don’t go it alone. As you grow your business, look to professionals, like property management companies, lawyers and accountants to help guide your decisions. For taxes, if you are in doubt about anything contact Canada Revenue or your trusted accountant. And,if you’re looking to improve your own operations, be sure to check out our pricing for landlords.
