Tax deductions on rental property income In Canada

I knew that there were several tax deductions available in Canada when you begin earning rental income, but I wasn’t sure about the details. This became especially pertinent when I crunched the numbers and realized that my ROI wouldn’t be spectacular with the investment – so I should figure out how to shelter as much of it as possible from the taxman. It turns out there are a lot of options available to accomplish this purpose.

While I’m still no expert in income tax preparation, or the application of some of the “greyer” areas of tax deductions applicable to real estate, I think I’ve got a pretty good handle on the basics. When it comes to tax write-offs for landlords, expenses that can be claimed are generally broken up into two categories: current expenses & capital expenses.

A current expense is something that usually reoccurs periodically. For example, general maintenance such as re-staining a deck every few years would be a current expense. A capital expense is basically a lasting improvement to the property that will raise the value of the property. An example would be building an attached deck to the house you own. Some other capital costs would be the purchase price of the rental property and the legal fees associated with that purchase.

Deducting depreciation of the property against your income is useful in sheltering your cash flow, but the tax man will get his day when you sell the property and it comes time to figure out your capital gains.

The normal deductions on rental income

Here is a list of the other things you can deduct according to the Canada Revenue Agency:

• Your insurance on the property.
• Advertising that tries to attract people to your rental property.
• Several different fees from lawyers and mortgage brokers.
• The cost of office supplies (obviously this applies more to large-scale landlords).
• Bookkeeping/accounting/tax preparation fees.
• The salary/wages of your property manager and any other people you employ to take care or provide services to the property (and labour/time you put into the equation is not tax-deductible, however).
• Repairs to the property.
• Property taxes.
• The cost of providing utilities if you choose to pay for them on your rental agreement (making this an interesting perk to provide for clients).

Deducting your vehicle costs as a landlord

Vehicle costs aren’t as cut and dried as some of the other tax deductions that are available. You are allowed to deduct the cost of travelling to your rental property in order to manage it if you are the property manager – BUT not the cost of your board and lodging.

Related: Buying a house in Canada: a guide to buying your first home

You are not allowed to collect vehicle expenses associated with collecting rent unless you own two or more properties. You are allowed to deduct expenses if you meet these three criteria:

• You only have one rental property and you live fairly close;
• You do part or all of the maintenance on the property;
• You used your own vehicle to transport tools and building materials to your rental property.

Creating a tax-deductible mortgage with cash-damming and a HELOC

The most interesting and creative tax write-offs that I found associated with real estate had to do with the fact that any interest you pay in regards to investing in real estate is tax-deductible. Obviously, this is most easily applied to the interest you are paying on the property’s mortgage (likely a fairly large amount in most Canadian markets today – especially the first several years you own the house!).

Related: Investing in real estate without all the risk

The lesser-known strategy that I came across is known as cash-damming using a home equity line of credit. I had seen the concept applied to the financial strategy known as the Smith Manoeuvre but hadn’t realized it could also be advantageously applied to rental income.

The basic idea is that you tap into the equity you have in your home through a HELOC and use this money to pay for your expenses for the rental property. The money that you had budgeted for these expenses can be applied to pay down your principal residence’s mortgage. The idea is to convert an expense that is non-tax deductible (the mortgage on your principal residence) into a HELOC used entirely for business purposes – which is tax-deductible. Note that I stated entirely for business purposes because if you use even 10% or so of your HELOC for non-investment purposes, the CRA can have a field day with what becomes fairly complicated accounting.

Banking on the government continuing to give incentives to people to borrow money for the sake of investment is probably as close to a guaranteed win as you’re going to come. A vast majority of wealthy people depend on these sorts of tax deductions to run their companies and shelter their income, so you may as well take advantage of them too!

Rental expenses that are not tax-deductible

• The principal you’re paying on the mortgage.
• Land transfer taxes when you first purchase the property.
• Penalties incurred on your notice of assessment.
• Any personal labour you put into the game.
• Some people advocate for running your rental property (s) through a corporation. The tax breaks are applicable either way – but there are some arguments for one or the other which I think I’ll save for a post all on its own.

Updated for 2017

With the sharing economy becoming a bigger and bigger part of life for many Canadian landlords, understanding how tax deductions on rental income can be applied to cash that you received from Airbnb is more important than ever. The first step to determining the tax that you owe is specifying if your income is rental or business income. This can be a decisive difference – so it’s important to pay attention when the CRA states that if you are providing services other than basic lodging (such as linen or meals service) then your income falls under the business category – otherwise (and this is the case for most) it is considered rental income. If income is considered “business” – then you are responsible for making CPP contributions based on those numbers. If it’s determined to be rental income, then you simply file your Statement of Real Estate Rentals (T776) like normal.

It will be interesting to see going forward with variable and fixed mortgage rates staying so low if more and more Canadian landlords keep propping up extraordinarily high real estate prices in many urban centres across Canada. Given the relatively low vacancy rates, it appears that there is still considerable demand for rental housing – which shouldn’t surprise anyone given the current difficulty many young Canadians have in saving up a down payment to begin climbing the housing ladder.