The real estate market in top Canadian cities and the suburbs has been booming over the last few years because of the better economic conditions and the historically low interest rates. Many Individual landlords have invested in rental properties of all variety.
Rental income is generated when you rent a property you own. Rental income could be generated from a house, apartment, or a commercial building. The rental property may be acquired in your personal name, in a partnership, in a trust or a corporation. Depending on who owns the property, the tax consequences are very different.
Most often, as a landlord, the pressing question is, “should you report the income received from property rental while filing tax returns?” The second question that almost always follows is, “what are the deductions that can be included while filing tax returns?”
Rental income does fall under taxable income. However, one has the option to reduce the taxable rental income by including certain expenses incurred while renting the property or maintaining it. The tax levied on the rental income varies depending on certain factors. It differs depending on ownership- whether the property is personally owned, owned in partnership or if by a corporation. Let us look at these three in detail.
· Sole proprietorship: If a person owns and manages a rental property or properties, the business is termed as a sole proprietorship. In such cases, the income is taxed based on the tax rate applicable on the landlord’s personal income as it is not considered a separate legal entity. As a sole owner of the rental property, you have to provide the applicable form T776, also known as the Statement of Real Estate earnings for every owned property. This summarizes the rental revenues and deductions and helps compute the taxable income.
· Partner owned: If a property is owned in partnership (with either a friend or family), the property is considered as co-owned by the CRA (Canada Revenue Authority). The business is considered a partnership and is treated like a sole proprietorship, not considered a separate legal entity. Therefore, the separate tax filing is not required. Considering the rental income is shared between the owners based on a pre-decided ratio set in the agreement, the income should be included in respective personal incomes.
· Trust or corporation owned: If the rented property is owned by a trust or a corporation, the taxation works in a different manner, mainly because a trust or a corporation is considered a separate legal entity. It is subject to corporate tax, which comprises both federal tax (@38%) and provincial tax (the tax rate varies from province to province). The corporate tax rate, tax breaks offered by the government and tax credits will depend on the type of corporation or trust that owns the properties. The retained earnings post-tax that gets distributed to all shareholders is then considered as personal income.
There are certain tax deductions allowed. The expenses that you incur to manage and maintain the property (whether occupied or vacant) such as general cleaning and maintenance, insurance premiums and mortgage interests, local property taxes, any form of repair work, commissions and advertising costs, certain utility costs, etc. can be deducted.
Some of the deductible expenses allowed for rental property include:
As individual situations vary, It is advisable to hire a tax accountant who is well versed with the procedures to advise you on your specific rental property tax matter.
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