My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, August 22, 2011

The Income Tax implications of purchasing a rental property


Many people have been burned by the stock market over the past decade and find the stock market a confusing and complex place. On the other hand, many people feel that they have a better understanding and feel for real estate and have far more comfort owning real estate; in particular, rental real estate. While both stocks and real estate have their own risks, some proportion of both these types of assets should typically be owned in a properly allocated investment portfolio. In this blog, I will address some of the income tax and business issues associated with purchasing and owing a rental property. For a discussion of some of the non-tax issues you should consider in purchasing a rental property, The Wealthy Canadian has posted the first of a two part series on rental properties titled Tangible Assets .




The determination of a property’s location and the issue as to what is a fair price to pay for any rental property is a book unto its own. For purposes of this blog, let’s assume you have resolved these two issues and are about to purchase a rental property. The following are some of the issues you need to consider:

Legal Structure


Your first decision when purchasing a rental property is whether to incorporate a company to acquire the property or to purchase the property in a personal/partnership capacity of some kind. If you are purchasing a one-off property, in most cases, as long as you can cover off any potential legal liability with insurance, there is minimal benefit of using a corporate structure.

In 2011, in Ontario, there is no tax benefit to purchasing the property in a corporation given the fact that the corporate income tax rate for passive rental income is identical to the highest personal marginal income tax rate, 46%. Given their is no income tax incentive to utilize a corporation, when you include the cost of the professional fees associated with a corporation, in most cases, the use of a corporation does not make sense.

In addition, if the property is purchased in one’s personal capacity, any operating losses can be used to offset other personal income. If the property runs an operating loss and is owned by a corporation, those losses will remain in the corporation and can only be utilized once the rental property incurs a profit.

If you decide to purchase a rental property in your personal capacity, you must then decide whether the legal structure will be sole ownership, a partnership or a joint venture. Many people purchase rental properties with friends or relatives and/or want to have the property held jointly with a spouse. Where it has been determined that the property will be owned with another person, most people fail to give any consideration to signing a partnership or joint venture agreement in regards to the property. This can be a costly oversight if the relationship between the property owners goes astray or there is disagreement between the parties in terms of how the rental property should be run.

One should also note that there are subtle differences between a partnership and a joint venture. This is a complicated legal issue, but for income tax purposes if the property is a partnership, the capital cost allowance (“CCA”) known to many as depreciation, must be claimed at the partnership level. Thus, the partners share in the CCA claim. However, if the property is purchased as a joint venture, each venturer can claim their own CCA, regardless of what the other person has done. This is a subtle, but significant difference.

Allocation of Purchase Price


Once the rental property is purchased, you must allocate the purchase price between land and building. Land is not depreciable for income tax purposes, so you will typically want to allocate the greatest proportion of the purchase price to the building which can be depreciated at 4% (assuming a residential rental property) on a declining basis per year. Most people do not have any hard data to support the allocation (the amount insured or realty tax bill may be useful) so it has become somewhat standard to allocate the purchase price typically 75% -80% to building and 25% - 20% to the land. However, where you have some support for another allocation, you should consider use of that allocation. Typically for condominium purchases, no allocation or, at maximum, an allocation of 10% is assigned to land.

Repairs and Maintenance


If you are purchasing a property and it is not in a condition to rent immediately, typically, those expenses must be capitalized to the cost of the building and depreciation will only commence once the building is available for use. When a building is purchased and is immediately available for rent or has been owned for some time and then requires some work to be done, you must review all significant repairs to determine if they can be considered a betterment to the property or the repairs simply return the property back to its original state. If a repair betters the property, the Canada Revenue Agency’s ("CRA") position set forth in Interpretation Bulletin 128R paragraph 4, is that the repair should be capitalized and not expensed. This is often a bone of contention between taxpayers and the CRA,

CCA


CCA (i.e. depreciation for tax purposes) is a double-edged sword. Where a property generates net income, depreciation can be claimed to the extent of the property’s net income. Generally, you cannot create a rental loss with tax depreciation unless the rental/leasing property is a principal business corporation. The depreciation claim tends to create positive cash flow once the property is fully rented, as the depreciation either eliminates or, at minimum, reduces the income tax owing in any year (depreciation is a non-cash deduction, thereby saving actual cash with no outlay of cash). Many people use the cash flow savings that result from the depreciation claim to aggressively pay down the mortgage on the renal property. The downside to claiming tax depreciation over the years is that upon the sale of the property, all the tax depreciation claimed in prior years is added back into income in the year of sale (assuming the property is sold for an amount greater than the original cost of the rental property). This add-back of prior year’s tax depreciation is known as recapture.

People who have owned a rental property for a long period, sometimes reach a point in time where they have such large recapture tax to pay, they don’t want to sell the rental property. Personally, I do not agree with this position, since it is really a question of what will be your net position upon a sale and are you selling the property at a good price. However, recapture is always an issue to be considered, especially for older properties that have been depreciated for years.

Also, if you have taken tax depreciation on a property and you decide at some point in time to move into the property, you will not be able to defer the gain under the “change of use” rules in the Income Tax Act. I discuss these "change of use" rules in a guest blog "Your principal residence is tax exempt" I wrote for The Retire Happy Blog.

Reasonable Expectation of Profit Test


Previously, if a rental property historically incurred losses for a period of time, the CRA may have challenged the deductibility of these losses on the basis that the taxpayer had no “reasonable expectation of profit”. Fortunately, the CRA's powers with respect to the enforcement of this test have been severely limited. The test has been reviewed by the Supreme Court of Canada and their view is that where the activity lacks any element of personal benefit and where the activity is not a hobby (i.e. it has been organized and carried on as a legitimate commercial activity) “the test should be applied sparingly and with a latitude favouring the taxpayer, whose business judgement may have been less than competent.” Consequently, concerns previously held in respect to utilizing losses from rental properties, even if the properties are not profitable for some period of time, are now mitigated.

Purchasing a rental property requires a considerable amount of thought and due diligence prior to the actual acquisition. Having a basic understanding of the income tax consequences can assist in making the final determination to purchase the rental property.

Bloggers Note: I will no longer answer any questions on this blog post. There are 294 questions and answers in the comment section below. I would suggest your question has probably been answered within those Q&A. Thanks for your understanding.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

312 comments:

  1. With respect to rental income being considered passive and therefore taxed at the high rate - is there are certain point or threshold when a real estate company's rental income is considered active and therefore eligible for the small business deduction? Is it still considered passive when you grow to a certain number of properties or employees?

    ReplyDelete
  2. Chris, great question, the answer is yes. Once a real estate corporation employs greater than 5 full time employees, they are considered a specified investment business and the income is deemed active and eligible for the small business rate of 15.5% or so depending upon your province.

    ReplyDelete
  3. Please explain the tax implications of selling a piece of land that was an original land grant by King George V, and had title cleared through tax sale in 1970.

    We are looking to sell the only remaining lot for substantial money due to the demand for this type of property in our area. It is currently jointly owned by four persons, all in the same family.

    ReplyDelete
    Replies
    1. Has the property been claiming CCA since it was granted by King George V?

      Delete
  4. Anon, You actually expect me to answer a complicated question about King George Land Grants on a blog? Engage an accountant, it is a complicated question.

    ReplyDelete
  5. Scenerio: Cottage owned by corporation and rented to public (as business, not long term rental). Cottage is used a couple of weekend per year by shareholders. Overall, the rental operated at a loss, even when considering the FMV of personal use. Do you agree that the cumulative losses (rental income + FMV of personal use - expenses) could be used against profitable years and the residual amount against the future capital gain on the sale of the cottage?

    ReplyDelete
    Replies
    1. Rob, I cannot or will not provide a definitive answer. However, if the cottage was run as a business and the personal use was minimal and reflected as a benefit in some manner, there is a definite argument to utilize the losses.

      Delete
  6. Wondering what to expect at tax time -- going through a messy divorce -- had to sell a jointly owned rental property. Just sold it for $150K more than purchased about 8 years ago . . .

    ReplyDelete
    Replies
    1. Anon- There are too many variables to answer your question. If both you and your ex are in the highest tax bracket, the maximum tax would be approx $35k on a $150k capital gain. That would be your worst case scenario, however, the tax payable could be significantly less if you and/or your spouse are in lower tax brackets.

      Delete
  7. What are your thoughts about claiming CCA on a commercial rental property held in an Ontario Corporation? The company has no business or assets other than the rental.

    My thinking is that rather than paying the high ~45% corp tax today, payment would effectively be deferred until the day the property is sold. At that point, tax will be paid on any resulting CCA recapture, and on any taxable capital gain above that.

    A rental operation that doesn't have a huge positive cash-flow (due to mortgage principal payments) will not have to worry about coughing up huge sums for income tax.

    ReplyDelete
    Replies
    1. Anon, I agree with your strategy in general. The exception would be in a low personal income tax year to pay the corp tax, pay yourself a dividend to get back the refundable tax in the corp and then pay little or no tax on the personal dividend if your income is low in that year. However, assuming you are employed, your plan would make sense.

      Recapture is a funny animal. I have seen people not want to sell properties because of the huge amount of tax they will pay on recapture and others who don't claim full CCA for that reason. However, I would personally got with the CCA claim now and pay the recapture later in most cases.

      Delete
  8. Hi there. My husband and I own a home in Guelph and I also own a second home that I am living in, in Toronto during the week as I work in downtown Toronto. Now I want to move to Guelph permanently and rent out the Toronto house, just to cover costs, so I can keep the property in the family for a few more years. What are the implications of claiming the rent as income? I realize that the rental income will be taxed at the highest rate, as my income is already high. What are you allowed to deduct as expenses? Mortgage interest and depreciation? I have a renter lined up that I know well and have no worries about keeping the property in good repair. Is it normally more profitable to rent a house out than to just sell it (there's an assumption here that real estate will be stable or rise, and in the meantime, the mortgage is being paid down). Thanks. Deb

    ReplyDelete
    Replies
    1. Hi Deb:

      Typical expenses you can deduct against rental income include: advertising, insurance, mortgage interest, management fees, maintenance and repairs, property taxes and utilities. Rental properties can also be depreciated. However, because of the fact you own two homes, you need to see an accountant to discuss how best to handle your principal residence designation(as both homes can be your PR in certain years) and depreciation. It is too complicated to discuss on a blog.

      I can’t answer your last question. I have clients that keep buying rental properties and swear by them as great investments, others hate dealing with the tenants and sell the house as soon as possible.

      Delete
  9. Hi Mark, very helpful. Just one clarification, when you say management fees, would that include what we typically call "condo fees". From the looks of it, the only thing you don't deduct is mortgage pricipal....is that a fair statement? Deb

    ReplyDelete
    Replies
    1. Hi Deb, management fees would include both condo fees or actual fees paid to manage.

      Hard to be so general, but mortgage principal is the main rental related expense that is non deductible. However, certain expenses you may consider to be repairs, may be depreciable and not deductible.

      Delete
  10. Hey Mark, extremely helpful...my principal is the "smallest" amount involved, so the tax hit will be FAR less than I was expecting.....you've helped me make up my mind. Cheers!! deb

    ReplyDelete
  11. Hello. I have been enjoying your Blog for several months and just found this entry. We have a recently purchased vacation property in the US and make it available for rent for the 9-10 months we don't use it - but our time is the prime rental period. 2 questions: first, do we deduct expenses on the basis of a simple personal use/rental use ratio?, and second, are the costs related to painting and electrician labour operating expenses, even though they 'improve' the property?

    ReplyDelete
    Replies
    1. Hi Mary:

      I assume the property is not in a corporation? If it is in a corporation, you have taxable benefit issues for your personal useage.

      Assuming not in corp, yes, you should use some sort of personal use to rental use ratio to reduce the expenses you claim.

      Ongoing painting and electrical would typically be "operating expenses". If the house was not rented and you undertook a major reno. they may be part of the capital improvement, but generally these expenses are deducted on an ongoing basis.

      Delete
    2. Many thanks, and no, it's not in a corporation. We were planning to use a Personal use days: Days available for Rent ratio even though we use the property during most of the prime rental season. Is there any case law or rules that govern this aspect that you are aware of? We haven't seen or heard of anything in our reading.

      Delete
    3. no case law or rules I am aware of- based on what would be reasonable allocation and the auditors opinion of your reasonableness in allocating expenses

      Delete
  12. Hi, I have a house in which I lived in for the first 4 years and then decided to rent it out. I've been renting it out for the last two and half years and now I want to sell it. What do I have to do to be exempt from paying capital gains?

    ReplyDelete
    Replies
    1. Hi Anon

      see this link to article I wrote on this. http://retirehappy.ca/your-principle-residence-is-tax-exempt/

      If you did not file the election, could be problematic.

      Delete
  13. Hi there! I own two properties. One is my principal residence and my inlaws live in the other home. My in laws take care of paying the mortgage and utilities in the home they live in. My question is, do I have to report to revenue canada that I have an income property? Also in the future, can I pass this house to one of my children instead of selling it and having to pay a lot of money on the capital gains?

    ReplyDelete
    Replies
    1. Hi Anon:

      In regard to the house your in-laws live in, it is a bit of a ticklish question. I will not answer your question, but I will tell you what I have seen most people do over the years. Whether what they do is correct or not, I will not comment. Most people consider the second property a personal use property and not an income property, since their parents are just covering costs and thus, they do not report the related income or costs covered.

      In regard to the transfer, you would technically trigger a deemed disposition at the fair value of the house if you transfer to it to your children and if the fair value at the time of transfer was higher than you cost, you would have a taxable capital gain. I would seek professional advice before making a transfer of any kind.


      Delete
  14. hi - My wife and I are thinkng of purchasing a rental property in Italy and use it personally 5 months a year and rent it out the rest. If we purchase two properties can we deduct our travel to Italy to oversee the properties. Can we duduct as an expense al lthe cots of making the property suitable for renting or only 7/12 odf the cost.

    Thanks

    Dave

    ReplyDelete
    Replies
    1. Hi Anon

      I dont provide specific income tax advice. That being said, I would suggest the CRA would definitely review any travel claims you made for Italy to oversee the properties. You should speak to your accountant about the 7/12, there are different arguments that can made.

      Delete
  15. Hi,
    I have a rental property 100% in my name and I am wondering if you thought it CRA allowable to pay my spouse a managent fee for overseeing the property. My wife is a homemaker and oversees any issues as they arise. It is of course non-arm's length, but she would be paid market rate for doing so and declare this income on her taxes.
    Thanks!

    ReplyDelete
    Replies
    1. Hi Anon

      To do so would not be unusual if she actually performs management tasks.

      Delete
  16. Hi. My wife and I purchased a house in mid-December and are renting it to my parents as an income property. I'm trying to determine what to set the value of the building at for CCA purposes and as your article suggests, it can be challenging. We anticipate annual net income on the property before CCA deductions to be small. So my question is, should we set a lower building value as we don't need a large CCA deduction to reduce the net income to zero or should we set the building value as high as is reasonable?
    Thanks!

    ReplyDelete
    Replies
    1. Hi Anon

      You are suppossed to apportionate land and building based on your best estimate of fair market value. Obviously, that can vary within a large range.

      All I can say is the following:

      Allocate as best you can.

      You cannot create a loss by claiming CCA so no huge advantage of a large claim, plus any CCA claim may be recaptured upon sale.

      Delete
  17. Hi,

    In reference to line 8710 on Form T776...
    When purchasing rental properties are the costs (legal, appraisal, title insurance, etc) associated with securing and registering a mortgage deductible as a current expense over 5 years ie 20% per year or would they be considered captial expenses?

    Also how would you suggest claiming common expenses related to several properties (bank fees, office supplies/equipment, etc)?

    Thanks,
    Greg

    ReplyDelete
    Replies
    1. Hi Anon

      It has been my experience that most accountants typically capitalize those initial costs to the land and building as they are part and parcel of the required costs to purchase the property and they only amortize over 5 years when there is a re-financing charge or fee. However you could probably argue that some portion of those initial costs relate directly to the financing as opposed to the purchase.

      For the common expenses I would just allocate based on rental income for each prop, but I have seen just an equal allocation based on number of properties owned.

      Delete
  18. Hi,
    Me and my husband owns a rental property .We divide the rental income at 90% for me and 10% for my husband as he is already at higher bracket.Is it ok to do that ? We are the joint tenants ....Do we need to have any formal partnership contract?....thanks

    ReplyDelete
    Replies
    1. Hi Anon

      Nice tax planning but it does not work in so many ways. I am not a lawyer, but my understanding is that a joint tenancy under law means both parties own equal shares, so first off I think you are offside your agreement. I think you would require a partnerhsip agreement to even attempt to allocate the income as you are. Secondly, from the CRA perspective, assuming they allowed a 90/10 split, they would want to see that the ownership reflects the economic reality. Did you put in 90% of the cash or assume 90% of the mortgage. From above, it sounds like your husband would have contributed more money than you based on a higher income and thus the CRA could attribute the income back to him.

      Anyways, I think you may have some exposure if the CRA audits you. The prudent thing would be to go to a tax lawyer to see if they could paper an agreement for you that reflects the reality you desire.

      Delete
  19. Hi Great Blog!

    I was wondering if I can claim MGMT expenses as an owner for my time? and would it make any difference if I was a licensed property manager?

    Thanks

    ReplyDelete
    Replies
    1. Hi Anon

      No, not if you own the property personally. What would be the point anyways? The decrease in rental income would be offset by an increase in self employment income?

      Delete
  20. We are Americans. I read that CRA will take a 50% withholding tax on the sale of our Canadian home. We have filed an NR6 every year, experienced some withholding, but had all withheld funds returned to us after filing our Section 216 every year.

    We planned to move to Canada upon retirement. We discovered that Immigration is no longer very interested in retired Americans, so we have reluctantly decided to sell our rental home.

    We purchased in 2003 and did not use Capital Cost Allowance (did not want to recapture when we moved to Canada).

    We have operated at a slight loss nearly every single year we have owned our home. How does the 50% withholding work? What percentage will we regain and how long will that take (until next tax season?)? What is the capital gains that we should expect to pay, since the home has appreciated to double what it was worth in 2003?

    Thank you.

    ReplyDelete
    Replies
    1. Hi Anon

      I dont have time to get into this, however, if you get a clearance certificate, the tax withholding will be far less than 50%.

      See this article for a discussion

      http://www.garyserra.com/TaxImplicationsForNonResidentsSellingCanadianRealEstate.php

      or this article

      http://www.howlandtax.com/articles/2062.htm

      Delete
  21. Hi,

    Great blog Mark and thank you for your time. We've recently used equity in our home to purchase rental properties. Assuming we remortgaged from $50,000 to $150,000 and used the $100,000 to purchase income properties is it possible to claim a deduction on the interest paid on the $100,000 amount.

    Thank you.

    ReplyDelete
    Replies
    1. Hi Anon

      Yes, however, be dilligent tracking the interest related to the $100,000, esepecially if you add or repay amounts on your line and deductible and non deductible amounts get co-mingled.

      Delete
  22. Hi Mark,

    Thanks for all the information. This is my situation. I own a 12 plex which I keep under a Corporation. The corporation is just turning profitable. To save paying the 46% corporate tax rate, can I pay my self wages equal to the corporate profit, thus making the profit taxable at my own personal income level?

    Secondly, as I actually live in the building as the caretaker/gardener/builder and supervisor (almost a full time job), would the corporation be charged at the passive rate considering I have a very active relationship with the rental business?

    Many thanks, Bill

    ReplyDelete
    Replies
    1. Hi Bill

      Speak to your accountant, it may be better overall to pay dividends than take salary

      To not be passive you would need more than 5 full time employees

      Delete
    2. Thanks so much, Mark. I really appreciate your help.

      Regards, Bill

      Delete
  23. Hi Mark, we are in the midst of relocating from AB to Ont, problem selling our home in AB due to the market, I am not on the mortgage in AB but could likely acquire a mortgage here in Ont. This will eliminate the 20% rule, we have several enquiries in regards to renting out our home in AB. What should we be aware of, tax implications, etc... are property mngr a deduction. Is this a realistic "smart" way to deal with the house in AB?

    ReplyDelete
    Replies
    1. Hi Anon

      Way to complex a question to answer on this blog.

      Property managers are deductible.

      You will have change in use issues, see the link above in the blog "Your principal residence is tax exempt" for some of those issues.

      You may want to engage an accountant or financial planner to help you with these issues and the decision as to whether renting makes economic sense in your situation.

      Delete
  24. Hi Mark: I am considering purchasing a new contruction home to either rent or sell once I get possession...which will not be until 2014 (one year from now). What tax write-offs can I use this year? I will be using equity from my current home for the mortgage and will need to put a $15,000 down payment now. My spouse has no income so should we put this in her name or mine? Thanks!

    ReplyDelete
    Replies
    1. Hi Anon:

      The spouse question is a loaded question. Technically, if the funds are yours, the property should be in your name. If the funds come from a joint line of credit it should be owned 50/50. However, I have seen many cases where people disregard where the funds come from and put the rental property in their spouses name. Does not make it right, but not unusual. It should be noted if there is a capital gain in the future, it is obviously better if the property is in the lower income spouses name. However, if in the future there are rental losses, you would be able to w/o the losses against regular income if the house is in your name. So not a clear answer.

      Most if not all costs would not be deductible until the property was ready to rent and would have to be capitalized to the cost of the property.

      Delete
    2. Wow, that was quick! Thanks for the response.

      Delete
    3. Another quicky...if I purchase an investment property, put down $15,000 on it, and then sell it basically as soon as take possession of it, can I claim the interest on that $15,000 down payment or not because the only income I get from the property is a capital gain? Thanks again.

      Delete
    4. While you're at it...if I put this investment property in my spouses name, she will be claiming any capital gain...how do I claim any other expenses related to this investment like lawyers fees, land transfer tax, upgrades to the property before I sell it etc and who claims this (does it have to her or can it be me?). THanks

      Delete
    5. Anon, if you sell the property immediately there is a question of whether it is cap gain or business income. The interest on the $15k will be so immaterial, I dont think the CRA will be overly concerned either way.

      Lawyer fees, land transfer costs form part of the cost of the property and are not deductible. Upgrades are dependant upon when done and they must be claimed by the person owning the property. Thats it for you:)

      Delete
  25. Hi Mark, great blog - generally quite readable even for the tax ignorant. My wife and I are looking at buying our first house. One of the options we are considering is buying something with a rental suite; so my question refers to the taxation of the rental income. Given this would be our primary residence is the rental income from a suite taxed at our personal income tax rate or the high tax rate? We are in a lowish tax bracket.
    Thank you for any insight you may have

    ReplyDelete
    Replies
    1. Hi Anon,

      I try my best to keep it "readable". The income would be at your personal rate.

      Delete
  26. Love this Blog. Very helpful. My husband and I are looking at buying a rental property to rent to students near a university. My son would be one of 6 renters and all would share a single lease. Can I deduct any amount I pay him to look after the property (general maintenance, lawn care, etc) Also we may only keep it for a short time frame- while my son is in attendance. Does it make sense to get into rental hassles if only for 3-4 years? Lastly, when selling, is part of any capital gain eligible for the lifetime capital gain exemption? I have been reading about the lifetime CRA exemption in CRA booklets but I think I am not understanding them correctly. Any info is greatly appreciated.

    ReplyDelete
    Replies
    1. Ignore the capital gains exemption portion of my question. I figured it out.

      Delete
    2. Anon:

      Questions is order

      Can I deduct any amount I pay him to look after the property (general maintenance, lawn care, etc) - yes if reasonable, he must report income.

      Also we may only keep it for a short time frame- while my son is in attendance. Does it make sense to get into rental hassles if only for 3-4 years? Cant answer that. I have had several clients do as you contemplate. Most have been happy with the outcome, but a couple found it a hassle.

      Lastly, when selling, is part of any capital gain eligible for the lifetime capital gain exemption? NO

      Delete
  27. Great blog. Appreciate the sound information. On disposition, is there any basis for allocating all or a greater percentage of closing costs (legals, agents fees, etc.) to the building to increase the non capital operating loss vs the basis in which the land and building were initially split (in this case 71/29)?

    ReplyDelete
    Replies
    1. Thx Anon:

      I don't follow your ?. You will not create a non capital loss. The allocation of the closing costs are capital in nature and will only affect the size of the capital gain on the land and/or building. Do you mean u want to allocate those costs to the rental income/loss? In any event, those costs are capital and typically are allocated based on your original land/building allocation, although I have seen people change those allocations, but you better have some support to do so.

      Delete
    2. Sorry...my bad. Messed up terminology. Instead of non-capital loss, I meant to say terminal loss. Upon selling a property, if the proceeds received and allocated to the building are less than the UCC then I have a terminal loss. I was wondering if I could allocate a higher percentage of, for example, realtor fees to increase the terminal loss such that the % allocated would be higher than the original allocation between land and building at the onset of the rental acquisition?

      Delete
    3. Same answer. You can change the allocation, but you better have support for the change since if your return is looked at, that will stand out, since 98 out of 100, the allocation is the same on way in and way out.

      Delete
    4. Hi Mark,

      I am in a similar situation.. When you say 'better have support for the change,' what would be meant? We inappropriately assigned the land value at about 5% of the purchase price and 95% on the building. We were guided poorly. The land in essence is worth at least 35% of the sale price as the land is in a fantastic location and the building is a patchwork mess. We are having our realtors do comparables as to what other 'land' has sold for in the area and are going to use the square foot price to come up with the value of the land to declare on our sale. Would that suffice? If so, would we have to send those results from the realtor to CRA?

      Thank you kindly,
      Dave

      Delete
    5. Hi Dave,

      In your case, you have reason to change the allocation and your "comparables" summary would probably be sufficient evidence.

      The concern I have is as you readily admit the initial allocation was wrong. I don't think the CRA would appreciate a change in allocation that benefits you from a tax perspective, when your first allocation for land was grossly understated. Also, that allocation may or may not have impacted CCA claims. I think you have some wiggle room here, but I would not be comfortable going from a 5% to 35% allocation when the 5% was really 25-35% initially. So tread carefully and you may want some professional advice here.

      Also, never send the CRA anything they don't ask for. Just maintain as support in case of audit.

      Delete
  28. Hi Mark,
    We purchased a second property Oct 2012 - a fixer-upper. We are doing the work ourselves and plan to rent it out by April 2013. When can I claim my materail expenses.

    ReplyDelete
    Replies
    1. Hi Anon:

      Typically all the fixing up expenses would be capitalized (added)to the cost of the building until it is ready for occupancy.

      Delete
  29. Hi Anon,

    I have purchased a rental property jointly with my wife in the past year. We plan that this will eventually be our retirement home. The property is outside Canada so I understand there will be deemed disposition at one point.
    As the title is in both our names do I spilt between our tax returns or am I able to do a one time election?

    ReplyDelete
    Replies
    1. My name is Mark, although I wish after some posts I was anonymous :)

      The income and any related capital gains should be split based on ownership subject to more complicated attribution rules where one person paid all the money.

      Delete
  30. Hello,

    My parents have rented a home in Scarborough for 25 years at a very reasonable rate. My father recently passed and I have moved home from my rental situation to maintain the rent and household responsibilities with my mom. It is my dream to buy this house, the owner is ready to sell to our family and has been for years. I want to enter a partnership

    ReplyDelete
    Replies
    1. Michelle, I am not sure what your question is?

      Delete
  31. Hi Mark, Thanks for your educational blog.

    Having sold a rental property in 2012, that was purchased in 2001, I will be reporting a capital gain. I'd like to ask if we are allowed to adjust for INFLATION when determining the 'Adjusted cost base' (on Schedule 3 ,section 4). on my personal income tax return?
    Also any other thoughts would be welcomed.
    You mentioned "electing to bump your ACB", that would be pre 1994 property only right?

    Thanks for your time Mark,
    Bill

    ReplyDelete
    Replies
    1. Hi Bill, just on the blog, so u get a very quick answer. Unfortunately, you cannot adjust for inflation. Yes, the election is only for 1994 and pre properties. Only thing I can add is be sure you deduct commission and legal costs from your gain

      Delete
  32. Hi Mark,
    Our son is in UofT and we plan to buy a condo as rental property for next school year instead of him renting like this year. Not sure which way to do it to get the most tax benefit. A few questions -
    - should we buy in our name and rent the place to him and 2 other roommates treating the whole place as a rental property ? and can he claim the rent tax benefit ? (because we are the one paying his rent)
    - should we buy in his name and us as guarantors (suggested by the bank because only 5% down is needed) and he rents the place to 2 friends ?
    - is the rent not treated as income if the renters pay less rent and not getting rent receipts ?
    Thank you for your attention.
    Regards.

    ReplyDelete
    Replies
    1. Hi Anon:

      As per my blog post on Monday, I try to answer most questions, but I will not answer personal tax planning questions, which this question is.

      There are tons of issues in this question and my answers would depend upon various facts I dont know. This is somewhat complicated, you should meet with your accountant or if you dont have one, get advice on these questions. Sorry.

      Delete
    2. Hi Mark, I understand your standpoint, sorry. However, it's really appreciated if you can give me info on -
      - is the rent still considered rental income if I rent it to family / friends ? I read something before about rent collected from family/friends under market value need not reported, is it true ?
      - how to determine the market value rent ?
      Thanks again.

      Delete
    3. Hi Anon:

      Technically you must report all rent received even if family and technically it should be at FMV. Many families have a wink wink just cover the costs agreement and thus they do not report the rent, which does not make it right and/or consider the property personal use an don't charge rent and then don't claim say 1/3 of the expenses. There are lots of variations, which goes back to why you need professional advice as to your ownership options and treatment of the property and why I will not provide an answer.

      FMV rent is the rent you would charge an arms length person. So in your case what are you charging your son's roommates?

      Again, this is a complicated issue with multiple options on how to treat and you need to get proper advice on who should own and how rent should be charged or not charged.

      Delete
  33. My common law partner and I who already own a house that we live in, bought an additional duplex rental property in 2011 and then a triplex and another duplex in 2012. Are they claimable under T776 or anywhere else in the tax return? Also I did not claim the first duplec from 2011 in 2012 return, when we bought the first duplex, can I still claim it now? Thanks for your thoughts.
    Erin in Ontario

    ReplyDelete
    Replies
    1. HI Anon

      Unless you want a tax evasion charge I would suggest you report your rental income For 2011, file a T1 adjustment for 2011 and for 2012 the info goes on the T776

      Of course you must report your rental income and expenses, even if a loss.

      Delete
    2. I reported the income, I just didn't claim the purchase of the building in the CCA allowance. Can I still?
      Also is there a max per year CCA limit per person? I'm using turbo tax and when I got to claiming CCA for the 2nd building and when I got to the 3rd building as class 1, @ 4% it says my CCA for year is 0. Any thoughts?

      Delete
    3. Ok, now I follow! Yes, you can file a T1 adjustment to claim the CCA. The reason you have zero CCA on the third building is that you cannot create a rental loss with CCA. Thus, your net rental income for all the buildings combined was already down to zero and you cannot create a further loss with CCA

      Delete
  34. Hi Mark,

    I have purchased my first property, a condo, last month. At the time of booking with the builder last year, I mentioned it to be for my personal use & deposited 5% towards downpayment as needed. But now, have put in 15% more for mortgage qualifying.
    My question is can I rent this property to earn rental income instead of using it as my primary residence?

    Thanks.

    ReplyDelete
  35. My daughter had her first job last year as a waitress, part time at a modest-priced restaurant. She earns minimum waitress wage totalling about $2400. She did not keep track of tips and now I am trying to do her income tax. Should I estimate a wild guess? Is there a range that the CRA requires? I checked the CRA website but couldn't figure it out. Some shifts she got $0-$5, and others range form $20-$70. Thanks!

    ReplyDelete
    Replies
    1. Hi Anon, I don't have any idea what a standard tip percentage would be. Not an issue in my practice. My clients are the ones buying dinners.

      But considering she only made $2,500 and would owe no tax, I don't see it as a huge issue either way, so I would error on the moderate to higher side.

      Delete
    2. Thanks. I know it doesn't matter for 2012 but want to start out with the right approach because over the next four years as she and her siblings waitress while earning their university degrees, they will certainly be earning enough to impact their taxes (and more importantly, mine because of the student tuition transfer. I am in a high tax bracket and appreciate any deductions that I can take advantage of.) The chances of them accurately tracking tips seem slim.

      Delete
  36. Hi Mark,
    My husband and I own rental property jointly. If we were to take one of our names off the title and have it be a sole proprietorship, would that person then claim 100% of the rental income? This would be because we want the spouse in the higher tax bracket to not have to claim additional income. Thanks!

    ReplyDelete
    Replies
    1. Hi Anon:

      Lots of issues with your plan. There are tax issues like income attribution back to your husband and maybe land transfer issues.

      Also, if your husbands money was used to purchase the property it could be an issue if property was in your name to start (although the CRA does not seem to pursue this very much). You need to get professional advice before you do what you plan, as you may create income tax issues.

      Delete
    2. Thanks Mark! You have a great blog with really helpful tips. I'm really enjoying it. As you suggest, we will get professional advice on this.

      Delete
  37. Hi Mark,

    Excellent blog and thanks for the info.
    I have a question about one of the properties we purchased with the intent of fixing up, refinancing and then renting to own. Since we completed the reno's and refinanced within a year would the initial cost associated with the purchase be considered Capital Cost or a current expense and would the same apply for the refinancing expenses (ie: appraisals, legal and mortgage fees). Are we also correct to assume the expenses related to the actual renovations would be Capital Costs?

    Thanks again,
    Greg

    ReplyDelete
    Replies
    1. Hi Greg:

      I would need more facts to provide a definitive answer, but for guidance purposes, in general, since you were fixing up the property and it was not for rent, those costs would typically be capital. For the Refinancing expenses, you probably fall into IT-341 R4 which is as follows:

      Paragraph 2. Paragraph 20(1)(e) provides that a taxpayer can deduct an amount
      (other than an "excluded amount") for certain expenses that are incurred in
      the course of:

      (b) a borrowing of money used by the taxpayer for the purpose of earning
      income from a business or non-exempt income from property;


      Five-year apportionment

      Paragraph 4. Expenses incurred in transactions described in paragraph 2 are
      normally only deductible in equal portions over five years (hereinafter
      referred to as "the five-year apportionment rule"). The deduction in a
      taxation year for such an expense is restricted to the least of:

      (a) 20% of the expense;

      (b) the proportion of (a) above that the number of days in the taxation year
      is of 365; and

      (c) the amount, if any, by which the expense exceeds the total of each amount
      deductible in respect of the expense in computing income for a preceding
      taxation year.

      Delete
  38. My husband and I owned a home as joint tenants. Separated in 2012, and I "bought him out", so the former family home is in my name only now. He bought another home since, and I am not on the mortgage or the title. We are considering moving in together again to stay in the home which he bought. We have 2 children age 18 and 22. If the children continue to live in the house that I now own (former family home) and I don't charge them rent, would the house still be considered a rental property? Would I have to report capital gain if I decide to sell the house in a few years, even though nobody else was living in it besides our children?

    ReplyDelete
    Replies
    1. Hi Anon

      This ? is too complicated to answer on a blog,so I will only comment on one aspect. If you have two houses and live together again with your husband, you can only claim one principal residence per family. So depending upon the final living situation, some portion of the two houses will be taxable. You really need to get some professional advice once your situation settles.

      Delete
  39. Hello, I love your blog...lots of great information and scenarios to ponder :) My husband and I are wanting to purchase an property for my parents to live in. Wondering what would be the best way to do this. Currently, I am a stay-at-home mom, and my husband is employed with a $100K plus income. We would be borrowing from a secured line of credit on our principal residence (which will be joint between my spouse and I)to make a 20% down payment on the "new property". Just wondering if we should put both of our names on the mortgage for the "new property" and both names on title? What would be the best way for tax purposes? It would be best to note, that we aren't looking to earn a real "income" from this property. My parents are just going to pay us the amount for the mortgage and property tax...they will be responsible for the utilities. Should we set it up as a rental property? property for personal use? Help!

    ReplyDelete
    Replies
    1. Hi Anon

      Glad you like the blog.

      I don't provide personal tax planning on the blog. But here is what you should consider

      1. Given you will not have much if any rental income, your only tax issue will hopefully be a capital gain when you sell the property.

      2. As you are stay at home at home mom, the greater the capital gain allocation to you the better (assuming cap gain and not a cap loss) since you can use up the lower marginal tax rate.

      3. However, I would suggest you are constrained by the fact you are using joint funds via a joint LOC and thus, although per (2) you would like greater ownership, you are probably going to be stuck at 50/50 if you are tracking funds.

      Delete
  40. Hi -
    This is the best rental property tax blog that I have seen for Canada.

    My question is about net loss and the government. My husband and I make over $300K in combined income. We own a 1.3 Million dollar home and it has no mortgage. We are looking at purchasing a property which is close to 2 million dollars and finance the whole amount (based on LOC and new mortgage). It will clearly generates a net loss even if we get the maximum rental income. We have done the math and the savings on taxes and a moderate appreciation of the property is well worth it. We currently have a condo rental which has generated a modest profit for the past 5 years. Does the government care if you generate a loss for a extended period of time (over 10 years)? Thank You!

    ReplyDelete
    Replies
    1. Hi Anon,

      Flattery will usually get you everywhere. But in your case, it will only get you a link to a Torys LLP newsletter. However, that link although dated should answer your question.

      http://www.torys.com/Publications/Documents/Publication%20PDFs/CM02-17T.pdf

      Delete
  41. You are a rock star.

    We'll be contacting your firm about tax services.

    Thank you!

    ReplyDelete
    Replies
    1. THx, only problem is I have not had rock star hair since I was 25 :)

      Delete
  42. Hi Mark,
    Excellent blog!
    My husband and I are in the process of buying a rental property (multiplex). In the same time we want to start a business which will have as object (but not exclusively) management consultancy and services. Will we be allowed to employ our own company to do management services for the rental property (also in our name)? The company will be based at our primary residence.
    Thank you for your time and consideration.

    ReplyDelete
    Replies
    1. Hi Anon:

      What is the objective here? Most people have rental losses the first few years if they have a mortgage, so what would be the benefit of paying a fee to your corp, you would increase the rental loss and create income in your corp? If you will have net rental income, you will only defer the difference in your marginal rate vs 15.5%. If you pay your company you will have to be congnizant of the fair value of those services. Anyways, not something I can answer on a blog, you should get an accountant if you dont have one as your situation warrants it.

      Delete
  43. Hi Mark,

    Great Blog! I was wondering if you won a home in a lottery (which is tax free), and immediately sold it, would you have to pay income tax on the full sales amount (since you paid nothing for it, or you get a cost base equal to market value at the time you take possession of the home?

    Thank you.

    ReplyDelete
    Replies
    1. Hi Anon

      Never had that issue before. I would need to see the contract or contestant rules to provide a definitive answer. Under general income tax principles, "gifts" are acquired at FMV.

      Delete
  44. Hi Mark:

    My mother "gifted" her rental property to my sister back in September. I understand she incurred a capital gain of approx. $30 000. Does she, and if she does, how does she include her capital gain on her income tax return.

    ReplyDelete
    Replies
    1. Hi Anon

      If your mom gifted the property, she does have a deemed sale. There also may be recapture if she claimed depreciation previously. It would be reported on schd 3 under real esate

      Delete
  45. Hi Mark.
    I'm living in a home that is in my friends name intrust for me 100% of which I will transfer to my name this June. All the utilities, bills etc are in my name except the mortgage/taxes which comes out of my bank account.

    My question is since the mortgage is paid directly to bank by me and all utilities are in my name and paid directly to utility companies by me, does my friend have to include the property in her taxes and what do I claim on my taxes regarding mortgage and property taxes??

    ReplyDelete
    Replies
    1. Anon,

      If the house is legally yours and the trust agreement valid, then the costs are yours. However, if it is your home, what costs are there to claim as none of them are deductible unless you claim a home office for employment or business? The only claim would maybe be prop taxes for a provincial credit.

      Delete
    2. Hi Mark, thanks for answering so quickly.

      Yes, the trust agreement is valid as it was put together and signed in the presence of a lawyer.

      The property is also used for business purposes, aside from prpty taxes can I not claim utilities and interest??

      I'm not a fan of blogs or taking advice online but I love your blog and appreciate your answers..

      Thanks again!

      Delete
    3. The property tax comment was in context of a potential personal tax credit claim (depending upon income) assuming no business use. If there is business use, then all costs relating to the house are deductible subject to business use. But keep that percentage reasonable.

      Delete
    4. Thank you again for your answer, greatly appreciated..

      Delete
  46. Hi there,
    My husband and I have a duplex in both our names. Both units are rented out at this time. My husband is the sole provider for the family and I stay at home with the kids. My question is how do we claim the rental? Do we claim it 50/50 or does my husband claim 100% since he is responsible for the expenses etc.

    ReplyDelete
    Replies
    1. Hi Anon

      Legally if ownership is 50/50, you must report the income 50/50. The other issue is income attribution. ie: whose money was used to purchase the property or was it a Line of Credit with both names. That issue is far to complex to discuss in this answer.

      Delete
  47. Hi Mark,

    I purchased a rental property several years ago for 250,000 and disclosed that the land was worth 50,000 and the building was worth 200,000. Upon sale for 500,000, do the land and building values still come into play or are they STRICTLY for CCA purposes? For example, since 50,000 is 20% of 250,000, would I declare the land to be worth 20% of 500,000, or 100,000? Therefore, the capital gains would only apply on the amount 400,000 - 200,000? Or, is the land/building factor not even relevant upon sale and the capital gain would simply be 500,000 - 250,000? I can't seem to find any articles or examples that clearly explain this.

    Thanks very much.
    Dave

    ReplyDelete
    Replies
    1. Anon, since you have a gain, it is the $500k proceeds less the $250k cost

      Delete
  48. Hi Mark,
    I learned quite a bit by reading your blog, thank you for making yourself so accessible to help with questions.

    My quick question is, if our rental property is in my name do I have to claim the income or can my Husband claim any or all of it? The cheques are deposited into a joint account if that matters at all. I am trying to find out if there is any way to pass this income to my Husband.

    Any advice you can provide to soften the blow I am going to face would REALLY help!

    Thanks!

    ReplyDelete
    Replies
    1. Hi Anon:

      Legally if ownership is 100% in your name, you must report all the income. As I noted in another recent question, there is potentially an income attribution issue. ie: whose money was used to purchase the property or was it a Line of Credit with both names. That issue is far too complex to discuss in this answer, but the attribution rules may work for you in this situation. However, you need to engage an accountant to review the issue as it is complex.

      Delete
  49. Hi Mark

    If you hire a property management firm that employs 5 or more full time staff to manage your property, (24-7)could that technically count toward the active biz status? Or in other words not passive income (maybe a long shot). How about this situation, a holding Co I have shares in has a controlling interest in a corporation that owns a rental property, however I work for the corporation and so do 4 other employees (fulltime of course) does this make the corporation that owns the property a active Company? Would this lower its tax statues from the high end bracket? Lastly why is passive income taxed at such a ridiculous rate? It seem incredibly unfair and the rules seem to be quite arbitrary...why 5 employees? Why not 2...?? Everywhere you look you hear real estate is a great investment....how is that possible at a 46% tax rate??

    ReplyDelete
    Replies
    1. Hi Anon

      The income may qualify as active where the business employs more than five full-time employees throughout the year. Thus, you need to exceed 5 employees.

      Part 1 above answers your second question, but speak to your accountant to see if you can somehow structure your situation to meet the criteria

      46% is because the government does not want people to gain access to the small business limit on passive investments, so they tax you at the high rate. However, the refundable tax system gives you credit for the high tax you pay and if you are not a high rate taxpayers to start, your overall tax may end up being far less than 46%.

      Delete
    2. Thanks for the fast respones. Ok I get that the goverment does not want you to gain access to the small biz limit. But why not just charge at the limit in excess of that? like a flat 26% on all income from rental property on the first dollar. The corporate rate and then if shareholders chooses to dividend out...they get taxed on appropriate dividend rate this seems more fair. I mean maybe you want to build up a strong finacial position....one my need it for futher investment one would think.

      Delete
    3. The 46% causes the tax system to be integrated in theory such that you pay the same tax whether you earn your invest income in a corp or personally. If you changed the rate to 26%, you would be better earning invest income in a corp and the gov. does not want that

      Delete
  50. Hi Mark,
    Thanks for your blog – it is very useful. My situation: I moved to Canada in Oct 2011. I have a rental property in the UK that I purchased in 2006. It has always been a rental property – it was never my principal residence. For calculating CCA do I use the purchase price in 2006 or the FMV from when I moved here in 2011? If/when I sell the property will Canadian capital gains be calculated based on the original purchase price or the 2011 FMV?
    Thanks
    Anna

    ReplyDelete
    Replies
    1. Hi Anon

      In general upon entering Canada your assets are re-valued for Cdn purposes on the date of entry. I suggest you discuss with your accountant or engage one as I cannot answer without knowing all your personal facts.

      Delete
  51. HELLO,
    If the property is registered duplex and assuming that I have no other properties and this would be my primary resident and I want to live in the half of the duplex, what is my capital gain taxes would be when I sale this duplex?

    . Also, if i change the whole duplex into single family home and just rent couple of rooms, what would be tax implications?

    If i show loss and I am not incorporated, what is going to happen to capital gains, when I want to sale as a duplex?

    . What do i need to change the duplex into single family home in Toronto? what are the costs?
    Many Thanks!!
    Robert.

    ReplyDelete
    Replies
    1. Robert, no disrepect, but way too complicated to answer on a blog and way too many questions. Engage an accountant.

      Delete
  52. Great blog, always great to see rental related tax advice outside of the CRA website.

    I have been involved in buying and fixing properties for renting for a few years as a hobby and spent much more time researching materials and techniques than the accounting side.

    I failed to allocate purchase price between land and building on a property 2 years ago and assigned full cost to building. I have just recently sold the property for a profit and now have to straigten out my mess before tax submission.

    I'm curious what violation this would constitute and perhaps suggestions on how to correct the original error.

    Thanks,
    Ed

    ReplyDelete
    Replies
    1. Hi Ed:

      If you sold at a profit, not sure it really matters. It typically may only matter if you sold at a loss. You firstly will have to recapture any depreciation you claimed. But for the capital gain side, you do not really need to allocate the land and building, just show the entire proceeds less the entire cost so the allocation will be irrelevant, but the full gain will be reported

      Delete
  53. Hello Mark! I subscribe to your blog and am an avid reader. I have learned a great amount from your blog. This particular post is excellent as are your answers to the many questions, thanks for providing it!

    My wife and I have owned 4 investment properties for about the past 5 years. My income has been about 4 to 9 times that of my wife's income for the past 25 years or so. All of the investment properties and our principal residence are only in my wife's name, since I am self employed and don't want any issues if I ever had a major judgment against me to protect the equity in those properties and our principal residence. We purchased all the properties with 20% cash downpayment from our savings. Income and expenses are all deposited and withdrawn from a separate joint bank account.

    I've been claiming 100% of the income/losses each year on my tax form. I'm the only person who has submitted T766 forms for each property. My wife is no longer working and I would like to push some of the future income/losses over to her income tax form by changing my percentage ownership from 100% to 50/50 as a co-owner. CRA states on bulletin IT-550 "you cannot change the percentage of the rental income or loss you report each year unless the percentage of your ownership in the property changes" so my question is this - am I allowed to change the percentage ownership now to 50/50 with my wife? Do you think if I do it will trigger an audit? Do you think that if I change the percentage ownership as co-owners to 50/50 that CRA will require me to amend all my previous 4 or 5 years of tax returns to show 50/50? (this amendment would result in me owing money to CRA due to less losses in some of the last 5 years on my tax returns). I would only make this change of ownership from 100% to 50/50 once and was thinking of changing only 2 of the investment properties in 2012 our tax forms and then the other 2 properties in our 2013 tax filings. What do you think I should do? Thank you! Mark

    ReplyDelete
    Replies
    1. Please be advised that due to income tax season time constraints, I will not answer any questions until May. Thx for your understanding.

      Anon, even if it was not tax season and I was answering questions I would say you have made a mess of your reporting and need to engage an accountant to try and straighten things out and definitiely do not arbitrarily change ownership without getting professional advice.

      Delete
  54. My spouse and I have a rental property, are their any advantages to putting it in our children's names?

    ReplyDelete
    Replies
    1. Please be advised that due to income tax season time constraints, I will not answer any questions until May. Thx for your understanding.

      Delete
  55. Hello,
    My wife and I have just purchased a condo in Hawaii and are planning on renting it for about 4 - 6 months of the year on a 30 day + at a time basis. I believe I understand what is required as far as Hawaii's TAT (transient accommodation tax) which I need to submit once every 6 months with my collected tax. My question is, am I still able to claim my expenses (mortgage interest, HOA fees and management company) against this income on my Canadian Income Tax return? I think I understood we would enter the foreign income and the tax paid to the foreign tax department on our Canadian return but am unsure if we can also fill in the rental income expenses on this return.
    Secondly, when claiming an expense or income on your return in a foreign currency, US$ for instance, what conversion is used? The date of the transaction, actual cost of the conversion?
    Mahalo for your help in advance
    Kevin Clark

    ReplyDelete
    Replies
    1. Please be advised that due to income tax season time constraints, I will not answer any questions until May. Thx for your understanding.

      Delete
  56. Hello,
    I sold my rental property in 2012 and am now filing my taxes and need to report a substantial capital gain. In 2010, I replaced the windows in the rental at a cost of $10,000 and in 2011 I replaced the funnace at a cost of $6000. Both items were treated as capital expensed items in my tax returns of 2010 and 2011. Hence I claimed 20% of window cost as expenses in my 2010 tax return. In 2011, I claimed another 20% of the window cost and also 20% of the furnace cost.
    I believe I should be able to claim the remaining 60% of the window cost and the remaining 80% of the furnace cost as a capital expense and add it to Adjusted Cost Base of the property to reduce my capital gains in 2012 when I sold the property. However, my accountant disagrees, saying I cannot treat these costs as expenses for the 2010 and 2011 years and then add the remainder to my capital costs when I sold the building.
    Your thoughts please?
    Many thanks
    Jim

    ReplyDelete
    Replies
    1. Please be advised that due to income tax season time constraints, I will not answer any questions until May. Thx for your understanding.

      Delete
  57. I bought 6 plex house last year and moved in making it my principle residence. I own no other property. My wife is a stay at home mom. I have decided to rent out a number of units to family members at nominal rental fee's, $100 p/m, is this allowed for tax purposes?
    My understanding is that I claim the entire 6 plex house as my personal residence when I sell, is this correct?
    I hope to convert the house to a 2 plex some time in the future and sell it, I do not plan to claim any capital costs along the way, just expenses, so is it correct that when I sell I wont have to pay any capital gains as the house is my PR.

    ReplyDelete
    Replies
    1. Please be advised that due to income tax season time constraints, I will not answer any questions until May. Thx for your understanding.

      Delete
  58. Hello Mark,

    I purchased a revenue property in Quebec 5 years ago and I am planning on possibly selling it this year. Can I amortize the capital gains from the sale over 5 years?

    I am considering possibly selling it and buying another revenue property immediatly afterwards. I.e. during the same year. I was told that if did do this then the capital gains from the sale of the property would not need to be declared since I am using the profit to buy another property. Is this true?

    Thank you.

    ReplyDelete
    Replies
    1. I think your answer is here
      http://www.cga-canada.org/en-ca/AboutCGACanada/CGAMagazine/2007/May-Jun/Pages/ca_2007_05-06_prof_taxstrategy.aspx

      Delete
  59. Hello,
    My husband and I currently have our own home, and 4 other single family rental homes...we plan to buy more and are wondering if we should incorporate and what is the best way to handle the rental income? is depreciation the best solution?
    we both work and make 55-60k each plus rental income (we do many fix ups and keep the income to a minimal)

    ReplyDelete
    Replies
    1. Hi Anon:

      I do not provide personal income tax planning advice on this blog. Your question is complicated, you should engage an accountant to get proper advice tailored to your situation.

      In general, you would incorporate to provide creditor protection; as if you were sued and under insured, under your current structure, all your properties and personal assets are at risk. Incorporation of passive rental income typically does not provide any income tax benefits.

      I have a blog upcoming on the depreciation question.

      Delete
  60. I have a couple of rental houses and currently considering incorporating them to credit proof my personal assets. I understand that the rental income is treated as passive income so no benefit, but is there a difference if the rental property was sold through a corporation or held personally - i.e. can the capital gain be reduced capital gains exemption?

    ReplyDelete
    Replies
    1. Hi Chris:

      Sorry, no cap gains exemption on rental properties as not active business that would qualify as a QSBC. Benefit is pretty much creditor proofing as u note and maybe some income splitting with your spouse depending upon the circumstances.

      Delete
  61. Hi, Great blog. I purchased a 2 floor office condo (525k, 2800 soft) and it's part of a 6 unit block of 2 floor office condos. One floor I rent out and one floor I use for my business. I can't find anything to indicate the value of the land for tax allocation. Do you think using the 10% rule of thumb would be appropriate in this situation and would a rule of thumb satisfy CRA?

    ReplyDelete
    Replies
    1. Hi Anon:

      Where there is no hard evidence to determine the allocation between land and the building, it would not be unusual for many accountants to use 10% for land related to a condo.

      That does not mean it is correct and that the CRA would not challenge the allocation, but for a $500k purchase I would be surprised if they cared.

      Delete
    2. Hi, I love your blog and how accessible you are, thank you so much for your contributions!

      I have a very old house that I have been renting for five years now. The roof has to be repaired or it will soon start to leak. We want to replace the roof with life-time guaranteed shingles. Is this kind of expense a current expense since it's required to maintain the current quality of the house or a capital expense since it also increases the value of the property? Thanks, Leah

      Delete
    3. Thx Leah

      Great question, sort of the $64,000 question for those who earn rental income. Technically the CRA could say you have improved your roof by purchasing shingles that are better than the prior shingles. However, given the cost is not that material compared to a new roof or parking garage etc, I would suggest at least 8 out of 10 accountants would expense the cost. I cannot tell you if I am in the eight or one of the two.

      Delete
  62. I was googling (is that a verb now?) my situation, and ran across this blog.

    I am considering moving to take another job, and I'd like to rent out my existing home to our son and his family. He could not carry the operating costs, so there would be a net loss each month off approx $500. Yes, he would be physically paying rent - just not enough to cover expenses.

    I've reviewed the 2002 case on the Reasonable Expectation of Profit test not being applicable - but one line in the ruling concerns me: "As long as there is no personal interest"(or similar words).

    I plan on retiring, and moving back to the home in approx 10 years, which is why I do not want to sell it.

    Could I claim losses for 10 years?

    BTW, I have another rental property (triplex), and am familiar with standard rules of income/expenses and CCA's.

    ReplyDelete
    Replies
    1. Anon,

      Rental income in respect of family rentals is a bit of a quagmire and I have seen or heard of the CRA going after such.I am not comfortable providing advice on this situation, but I would be concerned claiming losses on a rental to a family member at below market rent.

      Delete
  63. Thank you so much for your super fast reply! I have one more question. I own two rental properties, in two separate locations so I know I can claim a percentage of my vehicle costs, but do I also count as a business and can claim business-use-of-home expenses? Thanks, Leah

    ReplyDelete
    Replies
    1. Leah,

      The CRA says the following:

      you can deduct expenses for the business use of a work space in your home, as long as you meet one of the following conditions:

      •it is your principal place of business; or

      •you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

      You may qualify under the first criteria

      Delete
  64. Hello: I have purchased a new rental income property which will not be ready for occupancy until April, 2014. Can I purchase items for that property such as a washer/dryer, lawn mower, shed to hold equipment etc. that will be required for that property,this year even though my renters won't be in the property until next year? Can I claim them against my "other income" this year or are the items (either capital cost or current expenses) to be claimed next year against rental income? Thanks!

    ReplyDelete
    Replies
    1. Hi Anon

      You cannot claim these costs against other income and they will be capital items to be depreciated. In general there are available for use rules that say you cannot depreciate assets until the property is available for use, which would be 2014

      Delete
  65. HI, wondering how to calculate tax over capital gain for a rental property that i claimed CCA.

    For example, i am buying a $100K property during 2013, allocated 2/3 to building and 1/3 to land, and i will claim $2.5K CCA for 10 years (for simplicity rounded, calculated linear also just for the example, 4% of $66K )

    If i sell the property after 10 years at $200K, is my capital gain $200k-$100K +10 X $2.5k = $125K ? Would i pay half of my tax bracket over those $125K ? (half because it is an investment property)
    Thanks!!

    ReplyDelete
    Replies
    1. This comment has been removed by the author.

      Delete
    2. Just read somewhere else that i would pay 100% tax bracket over claimed CCA and 50% tax bracket over capital gain, thus 50% of $100k +100% of $25K = $75k

      Is that correct?

      Delete
    3. Eddy, I think you are misunderstanding. Those are the rates of inclusion, but they are then taxed at your personal rate.

      For eg. if you have a capital gain, one half is taxed, then taxed at your tax rate. Thus if your gain is $100k, $50k is taxed and at high rate tax, the tax would be $23,000, not $50,000. Same for recapture. If your recapture is $25k, it is taxed at your personal rate, assuming 46% high rate, max tax would be $12k or so, not $25k

      Delete
  66. If you transfer a personal residence to income property and 1 year later sell the income property is the gain treated as income for tax?

    ReplyDelete
    Replies
    1. Hi Mike

      This is a very fact specific question and I cannot provide a definitive answer. But if you make an election and dont claim depreciation on the rental property and sell after one year, you may be able to avoid any tax. You should obtain advice from an accountant to see if you can avoid paying tax.

      Delete
  67. If there is a loss on the property can you claim as an income loss?

    ReplyDelete
    Replies
    1. Can't answer that: depends on facts but income loss would typically be an aggressive stance to take

      Delete
  68. me and my husband try to buy a rent property and he will do all the work. I have full time job with higher income no time to deal with the property. How I can put all the profit from the property under his income?

    ReplyDelete
  69. Amanda. If it is your money it is problematic to put in ur husbands name. You may be able to make a prescribed loan but u should obtain advice if it works in your situation

    ReplyDelete
  70. I have a 100% rental property in Las Vegas, US. Can I claim the rental losses against my Canadian non-rental income? Thanks,

    Emily

    ReplyDelete
    Replies
    1. Emily,

      Yes, all worldwide income goes on your Cdn return. However, you cannot increase a loss by claiming depreciation; so you can only claim your Vegas rental loss against other income if you have a loss before depreciation.

      Delete
    2. Thanks, That is very helpful information. If I don't have any rental income can I still clam the loss?

      Delete
    3. Depends upon the facts, I cant answer. Often the answer is yes, but again, fact dependant.

      Delete
  71. I am interested in downsizing and would like to rent out my mortgage free home and rent an apartment. Do I have to pay tax on the rental income received from my home, even though I'm paying to rent an apartment.

    ReplyDelete
    Replies
    1. Unfortunately yes. Speak to an accountant about whether you should make an election on the change in use of your home

      Delete
  72. Very informative blog. My father is looking to update a property title which has himself and my grandfather (deceased 7 years) ago both as joint tenants. It was my grandfather's primary residence. My understanding is there will be a capital gain tax on this property when the title is updated. We have the city tax assessments for the years both before and after my grandfathers death. They are market value assessments by the municipality. Is there any other resource that the CRA would use to asses market value from 7 years ago when calculating the capital gain?

    ReplyDelete
    Replies
    1. Anon

      They could utilize an appraisal based on actual sales in the neighborhood.

      Delete
    2. Thank-you. Can this data from 7 years ago be obtained from any realtor? This property had a family member living in it for the last 7 years but she is moving out. It will now become a rental unit. It will be getting new windows, paint, electrical, and insulation. Can these be considered capital expenses to bring the property up condition as a rental unit? If they must be current expenses is there merit to waiting until January to do this work as the unit will not be empty and available to work on until mid October.

      Delete
    3. Most realtors should be able to obtain at least that is my experience, typically those expenses would be capital.

      Delete
  73. I have a personally owned rental cottage that earns a rental profit. It is used 50% personally/50% rental. Is there a manner that my corporation can purchase a share of the property that relates to the rental portion? Key consideration is how to do so without having to pay the HST on the share when the property is eventually sold. Is that possible via a trust or....

    ReplyDelete
    Replies
    1. Anon. I don't think u can legally separate rental from non rental in the corp, but confirm with your real estate lawyer. Even if u can not sure great idea as I don't see much of a tax benefit as passive income is taxed at the high corp rate

      Delete
  74. Hi,

    My wife recently purchsed a rental property via our joint secured line of credit. Is there any way for her to claim the full income on her own or will it have to be split even though the property is in her name. Is it posible to assign the funds as a loan from me to her via the LOC?

    Thanks

    ReplyDelete
    Replies
    1. Hi Anon:

      Legally your wife owns the property. Technically you have probably loaned your wife half the money or even purchased half the property. Practically this happens all the time and the spouse (wife reports all the income)whether correct or not.

      I will not provide a definitive answer to your question as I dont provide personal tax planning advice on this blog, all I can provide is what I have discussed in the first paragraph above.

      Delete
  75. Dear Bean Counter,

    I have a quick question about purchasing an investment real estate property. I have the opportunity to buy a 4-plex residential unit in Toronto from a seller who owns it under an Ontario number corporation. My question is: can I avoid the provincial and municipal land transfer taxes if I buy the corporation from the seller as opposed to the asset (4-plex)?

    Thanks in advance for your help.

    T

    ReplyDelete
    Replies
    1. Hi Tomek:

      I am not a real estate lawyer, so confirm with your lawyer, but my understanding is that it may be possible. However, you may inherit other issues in buying the corporation, the least being the cost of the property in now in the shares and not in the actual real estate which could be costly if when you sell the purchaser will only buy the real estate directly. You need to review this issue with your accountant.

      Delete
  76. Hello Bean Counter,
    I live in Alberta and have a full time job. I also have a small business corporation for which I work part time. I have some money saved up in the corporation to invest for the future. I try not to pull out any money from the corporation for tax deferral. I now want to invest in investment property residential or commercial. I may have minimal positive cash flow to start off with. Considering taxation in terms of annual cash flow and long term capital gains, does it make sense to invest through the corporation or pull out the money and buy as an family (me and my wife)?? Thank you in advance for your time.

    ReplyDelete
    Replies
    1. Hi Anon

      I do not provide specific personal income tax planning advice on this blog. However, you would need to look at the following:

      1. The tax cost to remove corporate funds via a dividend (if you buy the real estate in your corp. there is no taxes since you are using corporate tax paid monies)

      2. If rental losses in early year, where is the loss best utilized- in the corp or personally

      3. Your spouses income level

      4. Technically there is income attribution if you use your money to buy in your wife's name.

      Typically the answer will be to purchase the property in your invest co, but you should speak to your accountant to review the above issues plus any others particular to you.

      Delete
    2. Thank you bean counter.

      Delete
    3. Would it be more tax efficient if the property was owned within the corporation or individually when it is sold? Or does it make no difference??

      Delete
    4. Hi Anon

      The answer is dependant upon personal income tax rates, so I cannot answer. However, in general you would be indifferent unless you involve your wife and she has a very low income tax rate (however, as noted above you could have attribution issues if it is your money and your wife reports the gain)

      Delete
  77. Hi Bean Counter,

    I have a rental property and in the first year of operation I completed the CCA information relating to the property. In subsequent years I have skipped the CCA section on my income tax eventhough I made capital improvements to my rental property (these capital improvements were not claimed as repairs in the taxation year). Do I need to report all capital additions in the CCA each year or could I choose to keep track of the capital additions and deal with it when I sell the rental property?

    Thanks,

    ReplyDelete
    Replies
    1. Hi Anon

      Yes, you must or at least should report the capital improvements or u may have a huge issue trying to adjust at the time of sale (not that you cannot, just would be huge red flag for the CRA). I would just add all improvements to date this year and get back on track. Ensure you have all invoices to substantiate these additions and add all future improvements in the year they occur.

      Delete
    2. How long do you have to keep your invoices relating to capital improvements to the property? Thanks for your response to my previous question, it was very helpful.

      Delete
    3. check out my favourite posts on the right hand side of the page, there is a post on this topic under audits

      Delete
  78. Hi BC,

    I am thinking of purchasing either a house to live in or a commercial property with an apartment above so that I can live there. I would then rent out the commercial space to a store. Would I be able to claim this as my principal residence? Also, is there a tax advantage to this?

    ReplyDelete
    Replies
    1. Hi Anon

      You cannot claim the commercial space you rent out to a store as your principal residence, only the apartment portion.

      If you buy a house and rent out part of it, the answer is a bit more complicated --what is often practically done vs technical answer. These issues are not simple and you need to engage an accountant to assist you with these decisions and how you treat these issues.

      Delete
  79. If I own a rental property by my own, can I pay my husband to do all the repair and admin. work?

    ReplyDelete
    Replies
    1. Hi Amanda:

      In general yes; however the payments should be close to what you would pay an arms length person and you should document exactly what he does.

      Delete
  80. Hi, I live in Alberta, my wife and I are thinking of purchasing a new home and renting out our old home. Due to the area we live in we would most likely be renting at a small net loss. I am also in the highest income tax bracket. Would the net loss tax deductions be worth it for us to rent it out at this time?

    ReplyDelete
    Replies
    1. Anon

      This question involves tax and investment advice. I don't provide investment advice and I don't provide specific tax advice. That being said, a small tax loss will typically not be worth the purchase of a rental property on its own. Should you purchase the property, you need to ensure you think the investment is worthwhile and obtain income tax advice in regard to the change in use of your current home and the rental income issue

      Delete
  81. Hello,

    i was wondering if you had any ideas if the rental loss rules still apply to a corporation that has capital gains.
    Do you know of any rules that deny you from creating a rental loss by taking CCA on some buildings to offset the capital gain earned on a building sold during the year, or applying loss-carry forwards against the capital gain that were created by CCA in the past.

    it seems that the rules that exclude corps with rental as principal business would say yes. But it seems to go against the spirit of the rule, and is exactly why it is not allowed for individuals.

    thanks for you thoughts
    Peter

    ReplyDelete
    Replies
    1. Peter, if your corp qualifies as a Principal Business Corp you can create a loss with CCA which should be able to be used against a capital gain on other real estate. Your corporate accountant should be able to answer this question for you based on your particular facts.

      Delete
  82. Dear BBC,

    Excellent blog. My husband and I bought a rental property in Saskatoon this spring. He did most of the repairs prior to being able to rent it and he maintains the house and yard regularly while I manage it (keep it rented, pay the bills, communicate with tenants, etc). Our duties are completely separate from each other. We are profiting about $850/month so I am looking for some write offs. Can we pay ourselves for our time put into maintaining and managing the property?

    ReplyDelete
    Replies
    1. Hi Anon:

      If you and your husband jointly own the rental property, you will report the net rental income on your tax returns (I assume equally).

      If you could pay yourselves, what would be the point? Your rental income would be reduced, but you would then have to report the income for the services you rendered, so you would end up in the exact same place or worse (unless one spouse was in a much lower tax bracket).

      More importantly, in general you cannot pay salaries to partners in a business and fees to partners are often problematic. Unfortuatnely, I dont think your idea is workable.

      Delete
  83. Dear BBC
    love your blog, the best for rental tax related, some of accountants I talked to can't even tell rental income is passive income

    I am in busines of buying run-down houses, do the reno, and hold and rent,never want to sale at this point, I have two houses purchased under corporation, I am not sure if how the corporation handle refinance, can corportation return the money from refinance back to me, the shareholder of the company since I pay all the downpayment, renov all out of my personal pocket,assume the ammount from refinance is less than the total amount that I Put into the downpayment and reno,
    thank you very much, appreciate your insights. Elvin

    ReplyDelete
    Replies
    1. Thx Elvin,

      You are obviously a connoisseur of good blogs :)

      I dont provide specific tax planning advice on the blog, since as in your question, there are further issues I would want to know if I was your accountant. In general, there are "fill the hole" rules related to int deductibility and your situation may well fit these rules. Let your accountant confirm based on your specific facts. The relevant Interpretation Bulletin is IT-533.

      Delete
  84. Hello BBC,

    I run a small auto-repair shop. Years ago I incorporated the repair business and the commercial property/building that it resides in separately. The repair shop pays the property company a rent (which covers the mortgage). All other expenses (property tax, water, etc.) are paid by the repair business. This past year the property company's income statement has gone positive (a good thing). Looking to minimize tax; Is this active income for the property or am I stuck in the highest tax bracket going forward with my positive property income which will continue to grow as the interest part of the mortgage payments shrinks?

    ReplyDelete
    Replies
    1. Hi Mike:

      I cannot provide answers without knowing all the facts. However, the rental income may be deemed to be active business income of the rental company if it is considered associated with your company, which it may in fact be. Your accountant can confirm.

      Delete
  85. Hi Mike.
    Very informative article and more informative are your answers for reader's questions. And I have my question. I bought townhome for renting out using home equity line of credit for downpayment. If I get deposit from renter (say enough big, not just one month rent) and apply it against my own home mortgage which can increase available money for HELOC and will use that increase to purchase another house. Will be interest charged on these money deductible? Or I must put all profit from that business back to reduce operational cost of the business? Thanks.

    ReplyDelete
    Replies
    1. It’s Mark, not Mike, but I will still answer your question.

      If I understand correctly, you are going to pay down your non-deductible home mortgage and then borrow against your home to make a new investment.

      In general, for interest deductibility purposes you trace the use of the funds. Thus, the money used to purchase the new house should be deductible, since it will be used to purchase a rental property. You must ensure you keep records to show the CRA where the funds came from and the exact use of those funds.

      Delete
    2. Sorry Mark, thank you for quick answer. You are correct. The purchase will be clearly traceable - I use separate account to deal with rental properties and I use HELOC only for that. No persona; staff from line :-). Thanks again.

      Delete