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.
Do you know what rental property tax deductions apply in Canada, and what to do when tax season comes around?
You might be wondering, “Do I have to report all that rental income I earn from my property on my tax returns, or can I make 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 between the two major types of expenses recognized by the Canadian Revenue Agency (CRA).
Basic Types of Expenses for Tax Deductions on Rental Property in Canada
The CRA specifies not only the expenses that can be deducted from your rental income but also when, specifically the tax 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.
Capital vs. Current Expenses
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?
Why the Expense Type Matters
Is that all of the possible questions to determine expenses? 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.
Understanding how to judge the expense type is important for calculating deductions. Current expenses will only apply for one year and are relatively straightforward. Capital expenses, on the other hand, will need to be divided in very specific ways and applied over a few years’ taxes.
As a rental property owner, it is very important you learn how to properly apply these expenses when dealing with deductions so as not to make any mistakes on your taxes.
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.
A Guide to Rental Property Tax Deductions in Canada
Below is a list of tax deductions on rental property in Canada you can go ahead and claim right now. This should be done on Form T776 when filing your taxes.
If you advertise your rental property in magazines, newspapers, websites, and other similar places, go ahead and claim a tax deduction for all the fees you paid for this. 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 cover expenses incurred during the year.
In the event your premiums offer coverage for more than one year, you are only allowed to lessen the expenses in the year that they offer coverage for.
Make a full claim if you rent out your entire property. If the rented unit is part of your principal res