landlord has many things to
consider, but one of the most
important is covering off the many
tax issues.
Landlords can be individuals,
partners or corporations. While the
tax treatment of the net income differs
depending upon the structure, the
calculation of the net income is
generally the same.
Usually the determination of rental
income is pretty straightforward.
The rental payments that you receive
are included in income related to the
period rented. If a tenant is in arrears
at the end of the year, this would be
reported as revenue for the rental
period, not when the rent is received.
There are several categories of
deductible expenses. First are direct
expenditures of the leased premises.
These would include property taxes
and insurance premiums for the
property. If, as landlord, you are
paying for the heat and hydro, these
would be deductible expenses. If
the rental property is a condo, then
the condo fees are deductible. If a
property manager is hired, those
services are a deductible expense.
The value of the owner’s labour in
doing repairs for the property is not
deductible. That is because the value
would be both a rental property
expense and an income to the owner,
which results in no tax savings.
If the property was financed when
purchased, the mortgage interest
would be deductible. The interest
paid to the tenants on the rent
deposits is also a deductible expense.
Repairs and maintenance costs are
normally treated as direct deductible
expenses. Expenses that represent a
betterment to the property are not
expensed 100% in the year, but may
be as an expense over time through
capital cost allowance. Capital cost
allowance is the method used by
Canada Revenue Agency (CRA) to
allow for the write-off over time of
capital expenditures. CRA has
established certain write-off methods
and rates for different types of capital
items. Rental properties are subject
to a 4% declining balance method
compared with equipment, such as
appliances, which are subject to a 20%
rate. One significant rule is that a
landlord cannot create a rental loss
by claiming capital cost allowance.
If the property requires renovations
to put the building in shape to rent,
these costs would likely be capital,
not an expense. Whether an
expenditure is capital or a deductible
expense is not dependent upon the
cost amount. For example, the cost
to repaint the property would be a
deductible expense, but the cost to
put in an additional washroom would
be capital.
The amount that is reported for
tax purposes is the revenue less the
expenses. If the landlord is an
individual, then this net amount is
reported as additional income on
his/her individual tax return. If the
net amount is negative, then this is
used to reduce other income on the
individual tax return. If the property
is owned by more than one
individual, the full amount of the
rental revenue and expenses is
reported on the schedule of real
estate operations, and the applicable
ownership percentage is then applied
to the net income or loss. It goes
without saying that the amounts
for revenue and expenses need to
be consistently reported by all the
partners.
Some rental properties are owned
through a corporation. The tax rate
on the net income earned in the
corporation on this passive income
is 50.17%, which can be reduced to
19.5% if sufficient taxable dividends
are paid to the shareholders. If the
corporation is in the rental business
— which requires more than five full-
time employees — the income is taxed
at the small business rate, which is
currently 12.5% in Ontario.
When you sell the rental property,
the difference between what theproperty is sold for and the capital
costs of the property would be a
capital gain, of which 50% would
be taxable. This capital gain is not
eligible for the principal residence
exemption. However, if only a portion
of the principal residence is used as
rental (for example, the basement)
the principal residence exemption
would apply.
Oftentimes a property that has
been used as a principal residence
will be converted to a rental property.
Occasionally, a rental property is
converted to a principal residence. In
some instances, part of the principal
residence is turned into a rental
property. These have specific tax
treatments for a change in use of the
property, as deemed dispositions for
tax purposes could result.
If a principal residence is converted
to a rental property, there is an
election that can be filed with CRA
to allow the principal residence
designation to continue for a limited
number of years and avoid the
deemed disposition.
If the property is rented to a family
member, the rental rate must be
comparable to the rent charged to
a non-related party for any rental
losses to be deductible.
There are many tax considerations
when you are contemplating
becoming, or are, a residential
landlord, so think about consulting
with your tax professional to ensure
you are obtaining all the appropriate
deductions.Jennifer L. Fisher, FCPA, FCA, is a partner
with Wilkinson & Company LLP Chartered
Professional Accountants.42 JULY 17, 2019
A
Tax issues for landlords by Jennifer Fisher
There are many tax
considerations when
you are contemplating
becoming, or are, a
residential landlord