Basics, Rental Income

Rental properties: tax guidelines for landlords

By Robin Taub, CPA, CA, Tax Expert

Many Canadians choose to put their money to work by owning property – a house, an apartment building, an office building – and renting it. The guidelines that follow are for landlords who earn rental income from property. (If you’re unsure whether your rental income is income from property or income from business, the Canada Revenue Agency has more information.)

1. Calculating net rental income

Net rental income earned in the calendar year is reported on Form T776, Statement of Real Estate Rentals. It is calculated by deducting rental expenses and any capital cost allowance (CCA) for the rental property from your gross rents.
Examples of deductible expenses include:

  • Advertising
  • Insurance
  • Interest
  • Legal, accounting, and other professional fees
  • Management and administration fees
  • Maintenance and repairs
  • Salaries, wages, and benefits
  • Property taxes
  • Travel
  • Utilities
  • Car expenses
  • Office and other expenses

The cost of acquiring depreciable property like a building, furniture, or equipment, cannot be deducted from your rental income. It must be capitalized and written off over time. The amount that can be written off (depreciated) for tax purposes is called Capital Cost Allowance (CCA). There are specific classes and rates for different types of depreciable property. For example, buildings that fall into class 1 are depreciated on a declining balance basis (capital cost less CCA claimed in previous years) at a rate of 4% per year.

When you acquire property, you must determine how much of the initial cost relates to land, and how much relates to building (or other depreciable property like equipment). Land is not depreciable property and thus no CCA can be claimed.

2. Tax rules around rental losses

You decide how much CCA to claim – from zero to the maximum allowed for the year. However, CCA can only be claimed to the extent that it brings your net rental income down to zero. It cannot be used to create or increase a rental loss. If you do have rental losses (because your deductible expenses, not including CCA, exceed your gross rental income), they can generally be used to reduce income from other sources (such as employment income.)

3. Selling the property

When you sell your rental property, you will once again have to break down the total sale price between land and building. The difference between the proceeds for the land and its original cost is a capital gain if positive, (or a capital loss if negative), only half of which is subject to tax.

If CCA has been claimed against the building, and the sale price of the building is greater than the remaining Undepreciated Capital Cost (UCC) at the time of sale, this will result in “recapture” of the CCA. Since the building did not actually depreciate, you are effectively reversing some or all of the CCA you previously claimed. If the selling price is greater than the original cost of the building, you will also realize a capital gain, only half of which is taxable.

If on the other hand, the sale price is less than the UCC, the difference will be a “terminal loss” (assuming this was the only asset in the CCA class.) A terminal loss can be used to offset income for other sources such as business or property. You cannot claim a capital loss on depreciable property.

Note from TurboTax:

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About Robin Taub

Robin Taub is a financial literacy consultant, speaker and blogger and the best-selling author of A Parent’s Guide to Raising Money-Smart Kids.

She holds a Bachelor of Commerce (with High Distinction) from the Rotman School of Management at the University of Toronto and earned her Chartered Professional Accountant (CPA, CA) designation in 1989.

Robin is also passionate about improving opportunities for women CPAs to advance into positions of leadership and is Chair of the Chartered Professional Accountants of Canada’s Women’s Leadership Council.

She is an avid cyclist, snowboarder, music lover and concert goer and is the mother of two university age children.