RENTAL PROPERTIES

Income

All income associated with rental properties must be reported on your income tax return. This will include rental income from each unit, but may also include items such as common area maintenance, parking space rentals, or use of laundry facilities income.

Expenses

In general terms, any expenses incurred to earn the rental income are deductible for tax purposes. If your tenant reimburses you for these costs, you either have to report the receipt as income or reduce the expense by the reimbursement. These expenses must be supported by receipts. Although the receipts are not required to be filed with your tax returns, you must keep them in case Canada Customs and Revenue Agency selects your tax return for an audit. The following are some of the expenses you should consider when preparing the rental property income tax information:

Mortgage Interest:

Most banks provide an annual mortgage statement. If your bank does not provide an annual statement, you need the terms of the mortgage in order that an amortization schedule can be prepared for the period these terms apply to.

Mortgage interest is only deductible if the funds were used for the rental property. For example if you borrowed money by mortgaging your rental property and then used the funds to buy your personal home, the interest is not deductible.

Property Taxes:

The total property taxes for the year are on your Final Property Tax bill. If you pay your property taxes with you mortgage, the annual mortgage statement may also provide this information.

Utilities:

Utilities, which you pay for the rental property, can also be deducted. These include hydro, gas, and water.

Insurance:

Insurance premiums for the property insurance are deductible. Life insurance is also deductible if required for financing for the rental property.

Repairs and Maintenance:

These include any repairs and maintenance done on the rental property such as landscaping costs, painting, or cleaning services. Larger repairs such as replacing the roof or the windows are also deductible.

It is important at this time to distinguish between repairs and capital expenditures. For repairs, the total cost is deductible in the year it is paid. For capital expenditures, a percentage of the cost is expensed each year.

Generally, a repair fixes or replaces an item on the property that was already there to maintain the normal expected life of the rental property. Capital expenditures add to the value of the property. For example, replacing all the fixtures in an existing bathroom would be classed as a repair. Adding a new bathroom to the building would be considered a capital expenditure.

Management Fees: 

If you are paying a management agent to take care of your property for you, then these fees are deductible. These would also include condo fees.

Legal and Accounting Fees:

Although these are not required to earn the rental income, they are however necessary administrative functions and are therefore also deductible. These include bookkeeping costs and cost of preparing your rental statement for income tax purposes and also legal fees incurred in collections of delinquent accounts.

Vehicle Expenses:

Vehicle expenses incurred for the purpose of the rental property can also be deducted. This may involve traveling to and from the rental property or to do miscellaneous errands such as purchasing supplies. However, you must be careful to exclude any personal portion of the vehicle expenses. If you are using the vehicle for other purposes, you must keep proper records of the kilometers driven for the rental property. This can be accomplished by keeping a log noting the date, purpose and number of kilometers driven.

Other:

Other expenditures, which you may incur include telephone, cable and advertising costs.

Capital Cost Allowance (CCA):

This is allowable portion of the cost of capital items, such as the building itself, equipment, etc that can be claimed each year. The maximum rates are specified in the income tax act. This deduction can not be claimed if there is a rental loss for the year. CCA can only be claimed to bring income to nil.

Care must be taken when claiming capital cost allowance on buildings. Buildings generally do not depreciate in value. Therefore, when the property is sold at an amount greater than the original purchase price there will be a gain on the sale. The amount of CCA that has been claimed over the years must then be claimed as income in the year of the sale. Depending on the length of time the property was owned, this can create large taxable income in the year of the sale. This can be especially difficult if the sale of the property does not generate enough cash flow to cover the tax liability. For example, when the property is transferred to children there may not necessarily be any monetary consideration received.

Other Considerations

Circumstances arise when it is not possible to obtain accurate records for the expenditures. In such situations, you can estimate the expenses. However, you must be careful to ensure that your basis for the estimates and the amounts are reasonable and can be justified to an auditor.

If you have just purchased the property, you will need to provide the legal documents for that purchase. These documents usually include various transition adjustments, which must be reported either as an expense or income. Legal fees and land transfer taxes are not deductible in the year of the purchase, but rather form part of the cost of the property. Also, as discussed above, part of the cost of the building can be deducted as a capital cost allowance each year. The cost of land cannot be deducted against your rental income in any way. Therefore, you must consider what portion of the cost of the property relates to land versus the building, equipment and other depreciable assets.

If you occupy part of the property, you must determine the portion of the property, which you are using for your personal use. That portion of the expenses is not deductible.

If you share in the ownership of the rental property, you will be required to provide the following information regarding your partners: Name, Social Insurance Number, and percentage of ownership of each partner.