Becoming a landlord is a great way to diversify your income and even gain passive income. Apart from finding the perfect property and finding your ideal tenants it important to also consider the tax implications relevant for your individual situation.
How does rental income affect tax?
You need to understand how the three types of ownership models affect how much tax you owe. Regardless of the type of ownership arrangement you have, you are obligated to declare your rental income on your tax return. Here’s how:
1. Personally/sole proprietor: If you own the property you are renting out, you will be taxed based on your personal income, as there is no separation between you and the property. You will also have to fill out a Statement of Real Estate Earnings (T776).
2. Partnership: If you own the property as part of a partnership with your friends or family, you will have to declare the income you received from the property as laid out in your partnership agreement. This will have to be indicated on a Statement of Partnership income (T5013).
3. Corporation: If you have set up a corporation that owns the rented property, you will be taxed according to the federal and provincial corporate tax rates. If you are also paying dividends/ distributing the profits to yourself these will also effect your personal return.
How can I lower my tax obligation?
The most common way to lower how much tax you pay on your rental property is to claim property related expenses. These are expenses that are related to maintaining and managing the property, which include:
● Advertising
● Insurance
● Interest and bank charges
● Office expenses
● Professional fees (includes legal and accounting fees)
● Management and administration fees
● Repairs and maintenance
● Salaries, wages, and benefits (including employer's contributions)
● Property taxes
● Travel
● Utilities
● Motor vehicle expenses
● Other rental expenses (e.g landscaping, lease cancellation payments, condominium fees, and vacant land)
● Prepaid expenses
Of course, there are things that you cannot deduct from your tax return, which include:
● Land transfer taxes
● Mortgage principal
● Penalties
● Value of your own labour
● Personal portion of expenses
To put this more into perspective, there was a situation where a client had built a shed on their own property and attempted to claim it as a deductible. If you are purchasing items in relation to your own (owner occupied) property, these are not deductible against your rental income. The shed is an example of a purchase for your personal residence.
How do Airbnb rentals affect my tax obligation?
Although harder to manage on the operational side, Airbnb income is treated the same as any other rental income. It doesn’t matter if you’ve rented out your space for two nights in the year, all income must be reported. Net income (i.e. Airbnb income less expenses) is added to your total yearly income and taxed accordingly. The good news is that you can deduct a portion of operating expenses from your tax return according to how many days of the year your property is used by an Airbnb guest. To calculate this, you need to total all your expenses and multiply it by the number of days your place was occupied and divide by 365.
Important distinction with AirBnB rentals is that if you are offering meals and laundry services and charging for that, the CRA considers that as running a business. You will have to report your business income as self-employed income, in addition to your rental income. Wherever Your Landlord Journey Takes You Acquiring a rental property whether for long-term or short-term rentals is a great way to generate more income. While you are doing your research for the best property, learning to be a landlord, don’t forget to stay informed about the tax reporting portion. Make sure you have the ownership structure set up properly and you keep all your receipts. Missing this can ruin a great investment. Do your research or reach out to a CPA such as myself, Anthea, at Clear Margin Consulting. I’d be happy to help you manage the financial and tax side of your rental property!
Sources:
https://www.investopedia.com/articles/mortgages-real-estate/09/owning-real-estate-canada.asp
https://buttonwood.ca/tax-on-rental-income/
https://turbotax.intuit.ca/tips/earning-income-from-airbnb-4176
Share:
Thank you for contacting me.
I will get back to you as soon as possible.
@MORTGAGEBYTORI
| Mortgage By Tori | All Rights Reserved | Privacy and Content Notice