Many Canadians use rental property income as a way to create financial security for themselves and their families. As with most types of income, it is the property owner’s responsibility to report this income to the Canada Revenue Agency (CRA).
Did you know that many expenses can reduce the tax burden for landlords? Read below to learn more about the types of deductions that can be made, and how to claim them.
Types of Expenses for Rental Property Deductions
Although many different expenses can be deducted from rental property income, the way that those expenses are applied may differ. Some expenses can only be applied in the current tax year, while others must be deducted over a span of future years.
Current Expense or Capital Expense?
Current expenses are those which will re-occur in a short period. Expenses such as utilities, property taxes, or interest paid on your mortgage count as current expenses. Landscaping, driveway maintenance, and painting can also be claimed as current expenses. These expenses must be claimed in the tax year that they occurred.
On the other hand, Capital expenses are those which increase the market value of the property. The CRA defines Capital Expenses as “renovations and expenses that extend the useful life of your property or improve it beyond its original condition.” Capital expenses include upgrades to the siding of the property, replacing the roof with better material, or the construction of an addition. These expenses also include items that are separate from the property such as computer equipment or new appliances used for the property.
The CRA uses specific criteria in the determination of whether an item is a capital expense or a current expense. A list of the criteria can be found here.
What Expenses Can be Deducted?
Advertising
You can deduct expenses for advertising, including advertising in Canadian newspapers and on Canadian television and radio stations. You can also include any amount you paid as a finder's fee.
Insurance
You can deduct the premiums you pay on your rental property for the current year. If your policy gives coverage for more than one year, deduct only the premiums related to the current year.
Interest and Bank Charges
You can deduct interest incurred from the mortgage you borrowed to finance the purchase of your rental property. Funds borrowed to finance improvements to your property can also be deducted.
Office Expenses
You can deduct the cost of office expenses. These include small items such as pens, pencils, paper clips, stationery, and stamps. Office expenses do not include capital expenditures to acquire capital property such as calculators, filing cabinets, chairs, and a desk. These are capital items.
Professional Fees (Including legal and accounting fees)
You can deduct fees for legal services to prepare leases or collect overdue rents.
If you incur legal fees to buy your rental property, you cannot deduct them from your gross rental income. Instead, divide the fees between land and building, and add them to their respective cost.
Management and Administration Fees
You can deduct the amounts paid to a person or a company to manage your property.
You can also deduct amounts paid or payable to agents for collecting rents or finding new tenants.
If you paid commissions to a real estate agent when selling your rental property, these will be included in the capital gains and losses portion of your tax return in the year that you dispose of the property.
Repairs and Maintenance
You can deduct the cost of labour and materials for any minor repairs or maintenance done to property you use to earn income. You cannot deduct the value of your own labour.
You cannot deduct costs you incur for repairs that are capital in nature. However, you can claim a capital cost allowance.
Salaries, Wages, and Benefits (including employer's contributions)
You can deduct amounts paid or payable to superintendents, maintenance personnel, and others you employ to take care of your rental property. You cannot deduct the value of your own services.
Property Taxes
You can deduct property taxes you incurred for your rental property for the period it was available for rent. For example, you can deduct property taxes for the land and building where your rental property is situated. For more information, go to Vacant land and Construction soft costs.
Travel
You can deduct travel expenses you incur to collect rents, supervise repairs, and manage your properties.
Traveling expenses include the cost of getting to your rental property, but do not include board and lodging, which we consider to be personal expenses.
To claim the travel expenses you incur, you need to meet the same requirements discussed in Motor vehicle expenses.
Utilities
You can deduct expenses for utilities, such as gas, oil, electricity, water, and cable if your rental arrangement specifies that you pay for the utilities of your rental space or units.
Motor Vehicle Expenses
Motor vehicle expenses are deducted based on how many properties you own. If you own one rental property, you can deduct some motor vehicle expenses—provided that you are traveling to the property for maintenance purposes. You cannot deduct motor vehicle expenses incurred to collect rent unless you own more than one rental property. More about the motor vehicle expenses category can be found on the CRA’s website.
Other Expenses
Other rental expenses such as landscaping costs, condominium fees, vacant land, mortgage interest, and lease cancellation payments are deductible, but each is subject to conditions.
A complete list of rental property tax deductions with detailed explanations can be found here.
Do you need help calculating your rental income and expenses? Contact our office today.
Published by Elite Accounting Inc.
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