The idea of having a rental property is alluring as an investment to many Canadians. Often it starts as a simple cottage at the beach which the owner enjoys during his or her holiday period, and then generates sufficient income in the other summer weeks to pay for the property taxes and basic maintenance.
If you have a good experience at that level, a duplex in town or a small apartment complex follows, and the next thing you have a business that complements your other work initiatives.
The questions our clients ask most often about rental properties centre on what can legally be deducted according to the Canada Revenue Agency, and when their rental property experience turns from just rental income into a full-fledged business.
Let’s look first at the concept of rental income. Basically, rental income is categorized as income you secure from renting property you own or have the use of.
It can be a cottage, a house, an apartment, or even a room, an office space, a piece of land, a shed or a trailer.
If you just rent the property and provide the very basics of service and the tenant handles everything else, then it is classified as rental income.
What constitutes basic services? That would be heat, light, parking and laundry facilities.
But if you provide a large number of services to the tenant, such as regular cleaning, delivered meals, or security, then you are entering into the zone that would see it classified as a business. For example, if you add lawn-mowing, snow clearing, clearing off cars after storms, and planting flowerboxes and patio pots with annuals in the spring, you are entering closer to the business zone.
It is a good idea to talk to your accountant if you are wondering when you have crossed the divide.
Either way, the tax expenses you can claim generally fall in the categories of current expenses and capital expenses. As an example, suppose that you have to paint the cottage you rent every four years; that would be a current expense. But if you decide one year to install new siding and windows, that would be a lasting improvement to the building, so it would be a capital expense.
Standard expenses you can claim
Canada Revenue Agency allows you to claim the insurance on the property, any advertising you do to entice people to rent the property (save all receipts), some legal fees, bookkeeping and accounting fees, the wages of people you pay to help manage the property, repairs to the property, the property taxes, and the cost of paying the utilities if they are part of the rental agreement with your tenants.
What you cannot deduct is any of the hours of labor and sweat that you personally contribute to keeping up the property.
Be very careful if you plan to claim vehicle expenses linked to your rental income. This is by no means a cut and dried area and it is one in which people often get into trouble.
For example, you cannot collect any vehicle expenses linked to collecting rent unless you have at least two rental properties. But you may be allowed to collect vehicle expenses when you travel to it your property to do maintenance and you use your vehicle to transport tools to do the job. It is a good idea to discuss claiming vehicle expenses with your accountant before you assume that something is deductible.
Documents to bring your accountant
When it is time to do your taxes, there are crucial documents your accountant will need to ensure you benefit from all allowable deductions.
The address and number of units you rent
The rent per unit
Property taxes paid
Mortgage interest piad (bring the annual mortgage statement from your financial institution)
Repairs and maintence receipts
Renovation cost receipts
Your home insurance
Any additions to your assets
Current UCC of property as of Dec 31 of previous year.
Why rental income stays popular
Creating streams of income from property you rent is increasingly attractive to many clients faced with insecurity in their current full-time jobs or looking for ways to augment their retirement income. Once you dip your toe in the water of being a landlord, you discover quickly whether this is something you enjoy, or whether it is not in your comfort zone.
Either way, it makes sense to ensure that you make the most of the opportunity by ensuring your bookkeeping is kept up to date and that your taxation issues are handled by a certified expert who can ensure you get all the tax breaks you deserve for your efforts.
Certified professional bookkeeper and certified tax specialist Elena Ivanova is managing director of Piligrim Accounting Inc., a national accounting and tax preparation service based in Richmond Hill, Ont. You can reach her at email@example.com.