Whether you are just getting started with your first rental property or a real estate mogul, if you are getting money for rent, there’s a silent investor who needs its cut paid on time. Ever heard of such an investor? We are talking about CRA (Canada Revenue Agency), which gets its share of property rental income through taxes. Knowing all relevant rental property tax deductions in Canada can help reduce the total amount of taxes you have to pay.
Rental Property Tax Deductions in Canada
Even if you are renting out an illegal basement for just a hundred bucks a month, you should report your rental income accurately. You never know how or when your tenant will report you to the Canada Revenue agency or get randomly audited by the CRA. The consequences of not reporting rental income are not worth the benefits of dodging the Canada Revenue Authority.
The late fees and penalties are retroactive. Suppose CRA uncovers some fishy records from five years ago, you will pay a certain fine, then interest on that penalty, and anything you owe the tax agency. Not to mention that the penalty (plus interest) are compounded for a period of five years. Keep in mind that costs associated with running your property are deductible. Depending on your specific tax bracket, you can get some cash from the CRA or declare losses.
Here are the basic rental property tax deductions in Canada.
1. Advertising expenses
You can deduct all property advertising costs, including the cost of advertising your property on Canadian radio stations, newspapers, and televisions. Also, you can include the money you may have paid as a finder’s fee as part of the deductions.
2. Office expenses
Office expenses are part of the rental property tax deductions in Canada. These include the cost of items such as paper clips, pens, stamps, pencils, and stationery. Note that office expenses don’t include capital expenses such as the acquisition of filing cabinets, desks, and office chairs.
3. Insurance-related expenses
The CRA allows Canadians to deduct the premiums they pay on their rental property for the current tax year. Suppose your property insurance policy covers more than 12 months. In this case, you would deduct the amount of premiums related current tax year. You can deduct the remaining insurance premiums in the specific year they relate to.
4. Professional fees
Property owners can deduct the cost of legal services to collect overdue rents or prepare leases. Note if you incur legal-related expenses when buying your property, you can’t deduct these expenses from your gross rental revenue. Instead, divide the amount of the fees between building and land, then add the right amount to its respective cost. Consult with an experienced tax advisor to learn more about this process.
The legal expenses you incurred when selling your property can be deducted from the proceeds of deposition when calculating capital loss or capital gain. This deduction for legal fees may also apply when calculating a recapture of any capital cost allowance or terminal losses.
If you incurred expenses related to audits of your property-related records, bookkeeping services, and preparation of financial statements, you could deduct them from taxes. The fees for advice and professional help to prepare your property income tax returns and other related expenses all fall under the rental property tax deductions in Canada. Remember, these expenses are deductible if you need professional help because of your property rental operation.
5. Property management fees
It is possible to deduct the cash paid to an entity (person or company) to manage your rental property. Other relevant property management or administration costs include money paid or payable to agents for finding new tenants or collecting rent. Suppose you paid any commission to a realtor when selling your property. In that case, you can include them as expenses and outlays on Schedule 3 Capital Gains (or sometimes losses) when reporting the deposition of your rental property.
6. Property repairs and maintenance expenses
Property repairs and maintenance costs are part of the rental property tax deductions in Canada. The CRA allows you to deduct the cost of materials and labor for any repairs or maintenance done to your rental property. Note that you can’t deduct your own labor. Also, you can deduct the expenses you incur for repairs categorized as capital, but you can claim a capital expense allowance.
7. Wages, salaries, and benefits
Property owners can also deduct amounts payable or paid to maintenance personnel, superintendents, and other people you employed to take care of your property. As an employer, you can deduct various contributions such as Quebec Pension Plan, Canada Pension Plan, and employment insurance premiums.
It is also possible to deduct the workers’ compensation amount payable on the worker’s remuneration and PPIP (Provincial Parental Insurance Plan premiums. Note that PPIP is some kind of income replacement plan for Quebec residents. Insurance premiums paid for employees for accidents, sickness, income insurance plans, or disability are also part of the rental property tax deductions in Canada.
8. Property tax
Property taxes are also rental property tax deductions in Canada. That means you can deduct the property taxes you incurred for your rental property for the specific period the property was available for rent.
9. Travel expenses
It is possible to deduct travel expenses you incurred when collecting rent, supervise repairs, and other property management tasks. If you are not sure of the specific travel expenses classified as rental property tax deductions in Canada, consult with an experienced tax and financial advisor.
The CRA allows Canadian taxpayers to deduct utility expenses such as electricity, gas, cable, and oil, particularly if your rental property arrangement specifies that you pay these utilities of your rental units or rental space.
11. Prepaid expenses
Prepaid expenses are the expenses you may have paid for ahead of time. The CRA allows you to claim the expenses you prepay in the specific year the expenses are paid under the accrual accounting method. Under the cash accounting method, you can’t deduct prepaid expenses (except for inventory) related to the tax year that’s two or more years after the specific year that expense is paid. But you can still deduct a portion of the amount you paid in the previous year for the benefits you received in the current fiscal year.
Now you know the specific rental property tax deductions in Canada. Whether you choose to file your taxes on paper or online, it is recommended to consult with the tax professionals at PersonalBanker. We can help you uncover rental property tax deductions in Canada that could help maximize your rental income after tax.