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 residence, just claim the portion of the amount.
Under interests, there’s a variety of costs you can claim.
At the top of the list is the interest incurred from the mortgage you borrowed to finance the buying of your rental property. Don’t forget to mention all the fees charged when obtaining a mortgage, like the legal fees, mortgage application, appraisal, and so on. Leave out the mortgage principal as it’s not deductible.
Funds you borrowed to finance improvements to your property can also be deducted. However, it must be a soft cost, which the CRA defines as any fund you borrow for the sake of financing construction, upgrades, and renovations to your rental property with the aim of making it more suitable.
Professional Fees (Legal And Accounting Fees Included)
The fee incurred in hiring different types of professionals to work for you is deductible as well. Examples include attorney fees (for preparing leases, collecting overdue rents, etc.), accountant fees (for bookkeeping, auditing, preparing financial statements, etc.), and consultancy fees. Generally, you can deduct the professional fees incurred for the sake of running your rental operations.
However, legal expenses incurred to purchase a rental property can’t be deducted from the gross rental income; rather, split them between building and land, then add both to the specific costs they belong to.
Repairs, Maintenance, and Improvements
Expenses of normal repairs, like the cost of fixing a broken door or window, painting, and the like count as current expenses and can, therefore, be deducted in the year you incurred them.
Improvements, on the other hand, especially those done to your business assets, should be capitalized if:
They add value to the asset in question
To a noticeable degree, extend the duration you can use the asset
Adapt the asset to a totally different use
Improvements mostly cover real estate and are largely seen as adding value to your property. It could be the new electrical wiring, lighting, or plumping you put up or the project you undertook to rebuild your business equipment.
Thus, improvements can’t be deducted in the year they were incurred.
Management And Administration Fees
This category covers the amounts you paid a company or an individual to manage your rental property in Toronto. Other fees that also fall into this category include what you paid or is payable to real estate agents for finding new tenants or collecting rents.
If you hire a property management company to manage your properties or an accountant to work on organizing your rental property books, the fees paid for these are likely to be deductible.
Motor Vehicle Expenses
Deductions of motor vehicle expenses are done based on how many properties you own. For example, if you own a single rental property, you can go ahead and deduct specific motor expenses, but if only certain conditions are met.
However, you cannot deduct the cost you incur to collect rent unless you cover more than one property. More about this category can be found on the agency’s website.
Just as the name suggests, office expenses include the cost of buying items such as pens, paper, pencils, stamps, stationery, and the like.
These expenses can only be applied if the purchases in question were made for business use only. Items bought for personal use must be considered personal expenses, and those cannot be deducted.
Your province will determine how much you will pay for property taxes and then your municipality will collect the amount. Tax rules allow you to go ahead and subtract the property taxes your municipality has charged you in the current financial year. Remember to only claim the portion related directly to your property.
For instance, if you have a principal residence plus a basement apartment that you rent out, you can claim a percentage of the amount that is equivalent to the square footage the rented unit occupies.
Additionally, you can only claim property taxes for the period a rental unit was actually being rented out or was available to be rented out. If you did not convert your basement into a rental unit until six months in the year, you can only deduct property taxes for the remaining six months.
As a landlord, you are allowed to deduct specific travel expenses (both local and long distance) from your rental income that relate to your business. Commuting expenses say traveling from work to home or vice versa, aren’t included.
In the event you have your own automobile, you can make the deduction using two methods. The first one is the mileage rate. The other is by taking off the expenses incurred, such as gasoline, repair, and maintenance. Other expenses such as parking fees, tolls, interest on your car loan, applicable registration fees, license costs, and related taxes can also be deducted.
If you don’t own a vehicle, you are allowed to deduct all the public transportation expenses you’ve incurred that are business related.
Keep in mind that these travel expenses cannot be used to cover the cost of collecting rent if you are only managing a single unit. If you have multiple units in different areas, travel expenses may apply.
These are expenses you pay way ahead of their time. You can, therefore, go ahead and claim any prepaid expenses you make in the year or the years you get the attached advantage.
Utilities, no doubt, take a huge portion of the expenses you incur as a landlord. Thankfully, you can make a claim on your tax return for the utilities that are related to your property. That means you can only make a full claim if you rent out the entire property and a portion if only a part of your property is rented out. Utilities could be things like water, heat, cable, hydro, and the like.
Other rental expenses such as landscaping costs, condominium fees, vacant land, and lease cancellation payments are deductible but each is subject to unique conditions.
FAQs About Rental Property Tax Deductions in Canada
How Is Rental Income Taxed in Canada?
The tax rate for your rental income is going to depend on whether you are filing as an individual, in a partnership, or in a corporation.
If you are the sole-proprietor of your rental units, the tax rate is going to be the same as your personal tax rate. You will use this form to file. Partnerships will split the income between the partners, and then each partner will pay on that income at their personal tax rate. Finally, businesses will pay the appropriate tax rate for their business and location; the national tax rate for rental income is 38%.
For a complete guide to how your personalized tax situation might look like, check out this article all about rental income taxation in Canada.
Can You Deduct Property Taxes if You Rent Your Unit Out?
Yes; you can deduct property taxes in specific situations when renting out a property. The CRA says you can deduct these taxes for the period it was available to rent. This means you can deduct the property taxes when the rental unit is being marketed, but you cannot deduct them from when you were still doing renovations.
What Can I Write Off on My Rental Property in Canada?
Today’s guide has covered many of the expenses you can write-off on your taxes in Canada in detail; scroll back up to get a closer look at the details of those expenses and deductions.
Deductible rental expenses may include:
Cost of repairs
Salaries and wages
Cost of benefits
Cost of travel for work
The complete list from the Candian government of what rental expenses can be deducted can be found on their website with additional explanations here.
Can You Deduct Rental Expenses If You Have No Rental Income?
In some cases, it is possible to deduct rental expenses if you have no rental income or experience a rental loss. A rental loss occurs when your rental expenses are higher than your gross rental income. This can then be claimed against your other sources of income, but this situation may need to be verified when you file your income and expenses.
However, keep in mind that those deductions can only be made while the property is vacant but available to be rented. The deductions can cover the cost of maintaining the property while you wait to rent or sell it, but those deductions will not apply if the unit is not on the market.
Are Condo Fees Tax Deductible for Rental Property in Canada?
Yes; condominium fees are tax deductible in some rental situations. They can be taken as deductions when they impact what you would otherwise make in rental income. If your tenant pays the condominium fees, you cannot deduct them during that time period.
As you take note of these deductible expenses for rental property, it would also be great to have a look at the specific expenses the Agency says you can’t deduct from your rental income.
More specifically, that list includes:
Land Transfer Tax
The value of your own labor
… and more!