In the heart of the Greater Toronto Area, where high rents and property ownership costs prevail, many enterprising individuals have ventured into the realm of property ownership and seek ways to navigate the tax intricacies of rental income.
Extra sources of income can significantly boost your financial portfolio, but they can also come with complex tax obligations. The Canada Revenue Agency (CRA) might seem like an unwelcome guest, but with the right knowledge, you can ensure that you’re not paying more taxes than necessary.
Rental Income Tax Basics
If you make rental income, you must pay CRA taxes. The amount of tax you pay depends on different factors.
If you earn income from rental property as a sole proprietor, the CRA will calculate your rental income tax using your personal marginal tax rate. The same applies to rental properties under a partnership agreement.
The rental income tax for property under a corporation will depend on the applicable corporation tax rate.
Maximizing Tax Savings
You can reduce your rental income taxes by claiming eligible rental expenses. The extent to which you can claim rental expenses depends on whether the rental income is from a rental property or business.
Wondering what the difference between rental property and rental business is? The CRA simply states that your rental income is from rental property if you are only renting out space and providing basic services such as heat, light, parking, and laundry facilities.
However, if you provide extra rental services such as cleaning and providing meals, as would be seen in an Airbnb business or hospitality business, you may be operating as a business.
Rental expenses to reduce your rental income taxes can be classified as capital or current expenses.
Generally, capital expenses improve the value of your property and may increase the life of the property. An example of such expense is a roof replacement, major home renovations, or even the cost of furniture. You cannot claim the total value of this type of expense in the year you incurred it. You will need to deduct the cost capital cost allowance (CCA) over a period of years.
On the other hand, you can fully reduce your rental income with current expenses, such as repairs, minor renovations, insurance, bank interests and charges, advertising, cleaning, condominium fees, utilities, and property taxes.
Note that you cannot deduct your labor expenses if you are handy and choose to carry out repairs or maintenance yourself.
Professional Guidance for a Tax-Efficient Strategy
Use Form T776 Statement of Real Estate Rentals as a guide to calculating your net rental income for tax purposes.
As you journey through the intricate world of rental income taxes, remember that you don’t have to navigate it alone. Foster Family Office has a network of tax experts who can help you with your questions. Whether you’re uncertain about the nature of your rental income or need guidance on claiming expenses, reach out to us today. We’re here to assist you in crafting a tax-efficient financial strategy tailored to your unique situation.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
