Tax deduction tips for rental properties in Toronto
As a real estate investor, your goal is to optimize your cashflows. Part of it is optimizing your rent or having no vacancy. But another way of improving your cashflow is to apply your tax deductions on your rental expenses.
When can I deduct tax?
If you own a rental property in Canada and you hold title to it, you must report the activities of the rental property on your personal tax return in the Statement of Real Estate Rentals (T776 form)
You can find this form here: https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t776.html
You can find a guide on fulfilling the T776 form here: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036.html
Note that if you decide to run your rental property through a corporation you will have to fill another form.
Among other things, the schedule asks for the rental income generated from the property and the expenses incurred to keep the property operational.
In the Statement of Real Estate Rentals schedule, you will deduct all of your expenses from your gross rental income. The rental income remaining is what you pay tax on.
What can I deduct?
When it comes to tax write offs for landlords, expenses that can be claimed are generally broken up into two categories: current expenses & capital expenses.
Current expenses are recurring expenses that provide a short-term benefit. For example, a current expense is the cost of repairs you make to keep a rental property in the same condition as it was when you acquired it. You can deduct current expenses from your gross rental income in the year you incur them.
Here is a list of the current rental expenses you can deduct according to the Canada Revenue Agency:
- Advertising that tries to attract people to your rental property.
- Your insurance on the property.
- Several different fees from lawyers and mortgage brokers.
- Office expenses (like pens, adhesive tape etc. Usually insignificant)
- Bookkeeping/accounting/tax preparation fees.
- Management and administrative fees. For example the cost of a property Management
- The salary/wages of any people you employ to take care or provide services to the property. It’s important to note that the labour you put into your property is not tax deductible.
- Repairs to the property.
- Property taxes.
- The cost of providing utilities if you choose to pay for them on your rental agreement (making this an interesting perk to provide for clients).
- Travel expenses (but not all of them. For more details on what travel expenses are deductible see Guide T4036 on Rental income)
As for capital expenses, they provide a benefit that usually lasts for several years and tend to improve the property. For example, costs to buy or improve your property are capital expenses
Example of current expenses
- the purchase price of rental property
- legal fees and other costs connected with buying the property
- the cost of furniture and equipment you are renting with the property
Capital expenditures are slowly deducted from your rental income year-over-year, through depreciation, rather than in full in the year they occurred. For example, if a new roof costs $10,000 and lasts 15 years, you will get a $667 expense deduction each year ($10,000 / 15 years).
The details of depreciation can get complex and are beyond the scope of this write-up, so ensure you speak to an accountant before you proceed with filing your personal tax return.
What Isn’t Deductible?
- Land transfer taxes when you bought your property
- Mortgage principal
- Penalties shown on your notice of assessment
- Value of your own labour put into your property
- Personal portion of expenses. If you live in part of the property you are renting, your personal portion has to be calculated and cannot be deducted
The importance of keeping receipts
The CRA might want to see proof that you incurred these expenses. It’s advised to always keep all the receipts of all of the expenses incurred.