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Rental Taxes: Income and Expenses Simplified for Rental Properties

Rental properties have become a hot commodity for many in the ever changing Canadian real estate market. As of 2024, Statistics Canada says 30% of Canadians are renting their homes, that’s a big market for property investors. But as any seasoned landlord will tell you, the financial side of rental income and expenses is a big pain. Understanding rental income and deductible expenses is crucial for managing income tax obligations.

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Accurately completing your income tax return is essential to ensure proper tax treatment and compliance.

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Rental Income

What is Rental Income? Rental income is the money you receive from tenants for the use of your property. Rental income taxed in Canada can vary significantly based on location and ownership type. This includes not just the monthly rent but also any extra payments for utilities, parking or other services. In Canada rental income is taxable income, with rates varying by province and depending on whether the taxpayer is an individual, partnership or corporation. Rental income tax is applied differently based on the business structure, requiring proper filings like Form T776 for sole proprietorships, and affecting each partner’s tax obligations in partnerships.

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Types of Rental Income

  • Monthly Rent: The regular payments you receive from tenants.

  • Lease Payments: Payments received under a lease agreement.

  • Additional Charges: Income from utilities, parking fees or other services.

  • Security Deposits: If used as rent or to cover damages.

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In Canada, rental income is taxed at varying rates depending on whether it is earned by individuals or corporations, with specific implications in Ontario, including possible deductions and tax rates that can range significantly based on income and corporate status.

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Other Sources of Rental Income

  • Subletting Income

  • Rent-to-Own Payments

  • Barter Arrangements

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What the CRA Considers as Rental Income

The Canada Revenue Agency (CRA) considers more than just cash payments as rental income. Here’s a list:

  1. Security deposits (if used as rent)

  2. Premiums paid to cancel a lease

  3. Payments to break a lease

  4. Free rent provided to a caretaker as payment for services

  5. Payments for additional services (e.g. cleaning, laundry)

  6. Fees for subletting

  7. Insurance proceeds for lost rental income

  8. Subsidies received for rental properties

 

t’s important to know what constitutes rental income because all of it must be reported on your tax return. Not doing so can result in big penalties and interest from the CRA. In fact, the CRA can impose a penalty of up to 50% of the understated tax if they determine willful neglect or fraud. Landlords should accurately report rental income and be aware of the various expenses that can be deducted, following the CRA's guidelines on Form T776.

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Reporting Rental Income

Form T776: Statement of Real Estate Rentals

To report your rental income and expenses correctly you'll need to fill out Form T776. This form is required to declare your rental income and claim deductions. It has sections for gross rental income, expenses and net rental income. Additionally, you can claim capital cost allowance (CCA) on rental properties by determining when the property becomes available for use and ensuring it meets the requirements for depreciable properties.

 

Due Dates and Filing Requirements

Rental income is typically reported annually on your tax return. The deadline to file your tax return is usually April 30th of the following year. If you or your spouse or common-law partner is self-employed the deadline is June 15th but any balance owing must still be paid by April 30th.

 

Record Keeping

Keep accurate records of all rental income and expenses. Keep receipts, invoices and bank statements to support your claims. Good record keeping practices include:

  • Keeping a separate bank account for rental income and expenses

  • Using accounting software to track income and expenses

  • Keeping digital copies of all receipts and invoices

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Deductible Rental Expenses

Tracking rental income is relatively easy. The hard part is managing and documenting rental expenses. These are costs you incur to earn rental income and can reduce your tax bill if claimed properly.

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Let's break down the most common rental expenses:

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  1. Mortgage Interest Only the interest portion of your mortgage payments is deductible, not the principal repayment. In 2024 with average mortgage rates around 5-6% for a 5-year fixed term, this can be a big deduction.

  2. Property Taxes In Toronto the 2024 residential property tax rate is around 0.61% of the property's assessed value.

  3. Insurance Landlord insurance is 15-20% more than homeowner's insurance. This includes fire, theft and liability insurance.

  4. Utilities If paid by the landlord, this includes electricity, gas, water and internet/cable if provided.

  5. Repairs and Maintenance This can include everything from fixing a leaky faucet to repainting the entire property.

  6. Property Management Fees If you use a property management company their fees (usually 8-12% of monthly rent) are deductible.

  7. Advertising Costs This includes online listings, print ads and signage to find tenants.

  8. Travel Expenses If you don't live near your rental property, travel costs for management and maintenance are deductible.

  9. Professional Fees This includes fees paid to accountants, property managers and legal advisors.

  10. Office Expenses Costs for office supplies, phone and internet used for managing your rental property.

  11. Prepaid Expenses These are expenditures made in advance of their actual time of benefit. They can be claimed for deductions based on different accounting methods, such as accrual and cash basis.

 

It's important to distinguish between current and capital expenses. Current expenses are day-to-day costs necessary for maintaining the property, like minor repairs. In contrast, capital expenses are significant expenditures that enhance the property's value or extend its useful life, such as extensive renovations. These capital expenses cannot be fully deducted in the same tax year but are instead written off over several years through capital cost allowance (CCA).

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Keep in mind if a tenant doesn't pay rent landlords can face big financial implications. But they can deduct the unpaid rent from their gross rental income if proper documentation is kept.

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Capital Cost Allowance (CCA)

What is CCA? Capital Cost Allowance is the term used in Canadian tax law for depreciation that can be claimed on capital assets. For rental properties, this includes the building itself and any major equipment or appliances. It's important to differentiate between capital expenses and current expenses. Capital expenses, which enhance property value or extend its useful life, cannot be fully deducted in the same tax year but are instead written off over several years through capital cost allowance (CCA).

 

Examples of capital expenses include major renovations or additions to the property.

 

Calculating CCA The CCA rate for most residential rental buildings acquired after 1987 is 4% on a declining balance basis.

 

This means you can claim 4% of the remaining balance each year. For example:

 

Year 1: Building value = $500,000 CCA claim = $500,000 x 4% = $20,000 Remaining balance = $480,000

 

Year 2: CCA claim = $480,000 x 4% = $19,200 Remaining balance = $460,800

 

Classes of Depreciable Property Different types of property fall into different CCA classes, each with its own rate:

  • Class 1: Buildings acquired after 1987, 4%

  • Class 3: Buildings acquired before 1988, 5%

  • Class 8: Furniture, appliances and equipment, 20%

  • Class 10: Vehicles, 30%

 

Claiming CCA can reduce your taxable rental income in the short term but it's not always a good idea. Here's why:

  1. CCA reduces the cost base of your property for tax purposes. This means when you sell the property you'll have a larger capital gain (or smaller capital loss).

  2. If you claim CCA and then sell the property for more than its depreciated value you may have to “recapture” where the CCA you've claimed over the years is added back to your income in the year of sale.

  3. You can't use CCA to create or increase a rental loss.

  4. Once you start claiming CCA you must continue to do so in future years (although you can claim any amount up to the maximum).

 

Whether to claim CCA should be discussed with a tax professional, such as those at Tax Warriors of Toronto, as it depends on your individual situation and long-term plans for the property. Owning multiple rental properties can make this even more complicated.

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Record-Keeping: The Key to Stress-Free Tax Time

One of the biggest headaches for landlords is at tax time when they have to report all their rental income and expenses. The key to minimizing this stress is to keep good and organized records throughout the year. Additionally, tax credits can be utilized to reduce the tax burden on rental income, making it crucial to keep accurate records to claim these credits. Here's how:

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  1. Keep all receipts and invoices for expenses

  2. Use a separate bank account for your rental property

  3. Consider using landlord software

  4. Keep a log of time spent on property management and maintenance

  5. Document all communication with tenants

  6. Keep records of professional fees

  7. Keep a file for each property

  8. Regular updates: Set aside time each month to update your records

  9. Back up your records: Keep physical and digital copies

  10. Know the retention period: 6 years

 

Remember in case of a CRA audit the burden of proof is on you as the taxpayer. Without proper documentation the CRA may disallow your expense claims and you'll get a bigger tax bill plus interest and penalties.

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The GST/HST Dilemma

Some landlords have a GST/HST headache. Long term residential rentals (more than one month) are generally GST/HST exempt. But there are exceptions:

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  1. Short term accommodations (less than one month)

  2. Commercial property rentals

  3. Additional services beyond basic utilities

  4. New or substantially renovated residential complexes

 

If you have GST/HST on your rental activities you'll need to register for a GST/HST account if your total taxable revenue is over $30,000 in a single quarter or over four consecutive quarters. As of 2024 the GST/HST rate in Ontario is 13%.

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COVID-19 and Rental Properties

The global pandemic has brought new challenges for many landlords. Some have had reduced rental income due to tenant financial hardship while others have had to navigate the changing rules around evictions and rent increases. As we move into 2024 many of these impacts are still being felt.

 

Key points:

  1. Reduced rental income

  2. Government assistance

  3. Home office expenses

  4. Bad debts

  5. Additional cleaning and safety measures

  6. Mortgage deferrals

  7. Property Flipping

 

While most rental property owners are long termers, some flip properties – buy and sell quickly for a profit. The CRA has been cracking down on this in recent years and it's an area where many investors can unknowingly run afoul of tax laws.

If you're buying and selling properties frequently the CRA may consider your activities to be a business rather than a capital investment.

 

This can have big tax implications:

  1. Income classification

  2. GST/HST obligations

  3. Expense deductions

  4. CPP contributions

  5. Rental Properties and Your Principal Residence

 

If you've used part of your principal residence for rental purposes you may have to pay capital gains tax on that portion when you sell. The amount of tax will depend on:

  1. The percentage of your home used for rental purposes

  2. How long you used it as a rental

  3. Any increase in value of the property during the rental period

 

There are ways to minimize this tax hit, use the change-in-use election when you start or stop using part of your home as a rental.

  1. Common mistakes to avoid

  2. Overlooking deductions

  3. Incorrectly reporting income

  4. Mixing personal and rental expenses

  5. Not keeping proper records

  6. Tax tips for Maximizing Deductions

  7. Keeping detailed records

  8. Consulting a tax professional

  9. Using tax software

  10. Staying up to date with tax law changes

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Conclusion

Rental properties can be complicated but rental taxes don't have to be. With this guide Tax Warriors aims to make rental taxes easy to understand and manage for property owners in Toronto and across Canada. Remember keeping accurate records and staying up to date with tax regulations will save you time and money in the long run. For personalized advice for your situation contact the tax accountant experts at Tax Warriors of Toronto.

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