Maybe you own a rental property as an investment, or you rent out your basement suite to help with the mortgage. Either way, you want your rental property to be as profitable as possible, right? One mistake many landlords make is not including rental property tax deductions they’re eligible for when filing their taxes. But that’s leaving money on the table.
To unlock the hidden potential of your rental property, you need to understand how rental property expenses work in Canada and how to claim them on your tax return. Our guide lays out the basics and some common deductions.
- When you own a rental property, the rent you collect is taxable income.
- You can claim eligible expenses to lower how much tax you have to pay on that income.
- Eligible expenses include mortgage interest, property tax, utilities bills, and home insurance.
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How do rental property tax deductions work in Canada?
In Canada, the rent you collect from tenants is considered income and must be reported on your tax return. That means you pay tax on it. But the good news is, you can deduct eligible expenses first. How does that work? Essentially, you take your rental income and subtract expenses. You calculate tax payable on what’s left.
The difference between current and capital expenses
There are two kinds of expenses: current and capital. Here’s what they’re about:
- Current expenses. Expenses to maintain the rental property—for example, repairs—are called current expenses and can be deducted in full in the relevant tax year. These kinds of costs tend to recur regularly.
- Capital expenses. Expenses that enhance the value of the property and have a long-lasting life—for example, upgrading flooring—are called capital expenses. New assets you purchase, such as appliances, are another type of capital expense. These expenses have to be added to the value of the property and depreciated over time—they aren’t counted as rental expenses, per se.
Which rental expenses are tax deductible in Canada?
Here are some common rental property write-offs you should know about if you’re a landlord.
Claim a tax deduction for fees paid toward advertising your rental property, such as in newspapers and trade publications or on websites.
Deduct property insurance premiums paid toward coverage on your rental property. Include only the relevant tax year’s coverage, even if your premiums provide coverage for more than a year.
Interest and bank charges
Good news: you can claim mortgage interest or interest on money you borrowed to finance the purchase of your rental property or to improve it. Unfortunately, you can’t claim a tax deduction for your mortgage principal. As for loan interest, deduct only the money you borrowed to cover soft costs. The Canada Revenue Agency (CRA) defines soft costs as funds you borrow for construction, renovations, and upgrades to your rental property.
Also, you might be able to deduct expenses related to obtaining your mortgage, such as the cost of the mortgage application and appraisal, as well as legal fees paid to your real estate lawyer. The CRA explains the rules around this.
Do you buy pens, pencils, paper clips, stationery, or other small items to use for your rental property business? These can be claimed as office expenses. Larger items, such as computers, printers, chairs, and desks, should be claimed as capital expenses.
If you hire an accountant or other tax expert to help you prepare your return, the fees you pay are a deductible expense. This includes the TurboTax Live service, which offers packages with support from experts on rental property taxes.
Deduct property taxes paid to your municipality in the current year. Claim only the portion that relates to your rental property. For example, if you paid $3,000 in property taxes on your principal residence and you rent out your basement apartment (which is 40% of the square footage of your home), claim $1,200 on your tax return:
$3,000 x 40% = $1,200
Repairs and maintenance
You can deduct the cost of repairs on your rental property, including the labour. The expenses have to be current expenses, such as those related to restoring the property to its original condition, not to improving the value of the property. And, sorry, you can’t deduct a value for your own labour (though we’re sure you’re worth it).
Salaries and management fees
Amounts paid to your employees can be deducted—but alas, you can’t deduct your own salary (that is, if you pay yourself one). If you are an employer, you should deduct your contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI) plans. You can also deduct amounts paid to a third party to manage your property. Also, realtor fees related to the sale of a rental property can be claimed to reduce capital gains. Read a little more here on how this works.
If your rental property is in another municipality, you can deduct travel expenses incurred when going to collect the rent or maintain the property—but only those expenses related to actually managing the property (for example, you can’t deduct boarding or lodging).
You can claim a tax deduction for the portion of utilities related to your rental property or suite. The following utilities related to your property can be deducted (if you pay for them): heat, electricity, water, and cable.
One important point to keep in mind: If you’re renting part of your primary residence, claim only the portion of expenses that pertain specifically to the rental unit. For example, if you rent out your basement and pay the water bill for the entire home, you can’t claim the total amount of that bill on your taxes—just the portion that applies to the basement.
How do you claim rent expenses on your taxes?
While the CRA accepts other types of financial statements for claiming rental income and expenses, they encourage landlords to use form T776. Fill it out on your own when it’s time to file your taxes, or you can make it easier by using TurboTax, which helps you complete the form along with your entire income tax return.
Minimize your rental income; maximize your profits
By tracking and claiming all eligible expenses, you’ll be getting the most value out of your rental property or unit. Isn’t that why you have it in the first place? Save receipts, log what you spend, and make sure you have it all on hand at tax-filing time.
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