Income from your rental property(s) is taxable, but not all of it. You can reduce your taxable rental income by deducting specific expenses.

Generally, you report all income on your tax returns for the year you receive it. For example, if you collect the rent for January 2020 in December 2019, you report it as income on your tax returns for 2019. Similarly, when you get a deposit for the first and last month’s rent, it must be taxed in the year you receive it. However, if you plan to return the security deposit to the tenant at the end of a lease, don’t include it as income.

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If the tenant presents you with goods and services in exchange for the rent, you have to report their value as rental income when submitting tax returns for the year you received them.

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The Tax Impact of Your Rental Property

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Tax consequences vary depending on who owns the rental property:

1.       Personally

2.       In a partnership

3.       In a corporation

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1. Personally

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Your rental property is classified as a sole proprietorship if you own and personally manage it. As a self-managing landlord, your property isn’t viewed as a separate legal entity. This means it will be taxed based on your personal income.

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You’ll have to submit a Statement of Real Estate Earnings - Form T776 for every rental property you personally own. This form summarizes your rental revenues and deductions and helps to compute the taxable income to be reported on your personal tax returns.

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2. Partnership

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If you and your friend(s) or family member(s) joined forces to acquire a rental property(s), CRA considers you as co-owners and your business a partnership (once co-ownership is established). A partnership isn’t a separate legal entity, so no separate tax return is required.

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Normally, the partnership rental income is shared among the partners, based on a ratio set out in the partnership agreement. As a partner, you have to incorporate your respective share of the rental income in your personal by submitting a Form T776 indicating your percentage of the partnership.

3. A Trust/Cooperation

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If the rental property belongs to a corporation, you’ll have to consider multiple aspects when you want to determine the rental income tax rate in Canada. Unlike the other two, a corporation is a separate legal entity. The tenant pays the business, and the business is, thus, responsible for the taxes.

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The corporate tax rate is made up of both the federal tax and provincial tax. The federal rate is 38% and is applicable in all provinces. However, the provincial tax varies from province to province. Since retained earnings (the funds that remain after the corporation pays taxes) are distributed as dividends to the shareholders, this will count as personal income and each shareholder will be taxed on their marginal tax rate.

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To avoid double taxation, the tax rate is usually reduced where dividends are paid to shareholders.

Deductible expenses: These also apply even if the property(s) in question is temporarily vacant.  Some of the deductible expenses include:

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·       General cleaning and maintenance

·       Repairs

·       Advertising costs

·       Local property taxes

·       Depreciation

·       Commissions

·       Mortgage interests

·       Insurance premiums

·       Management fees and office expenses

·       Utilities

·       Specific travel/vehicle expenses

·       Garbage removal fees

·       If you have a vacation or second home that you rent out once in a while, you'll also need to consider this for tax purposes

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