If you own a rental property, you must report all the income you earn from it when you file your tax return. That’s because rental income is taxable in Canada. As usual, the Canada Revenue Agency (CRA) wants its fair share!
Luckily, there are many expenses you can claim on your tax return as a landlord to lower your tax bill. By maximizing your deductions, you’ll get to keep more money in your pocket rather than handing it over to the CRA.
In this article, we’ll walk you through the expenses you can claim to reduce the tax you must pay, including those landlords routinely overlook. We’ll also provide you with some tips for navigating some of the trickier deductions.
Current expenses vs. capital expenses
You can write off a wide range of expenses against your rental income. In general, they can be classified into two categories: current and capital.
Current expenses are the day-to-day costs of running your rental property. They reoccur after a short period and don’t provide any long-term value. Utility bills, like electricity and water, are an example of this expense. You can deduct current expenses in full in the year you incur them.
Capital expenses enhance the value of your property, improve it beyond its original state, or extend its useful life. These expenditures are akin to business investments, as they provide lasting benefits. For example, if you replaced the carpet in your rental with hardwood, the CRA would view the cost as a capital expense.
Unlike a current expense, you cannot fully deduct a capital expense in full in the year you pay for it. Instead, you claim depreciation on it over several years (more on this later). Under Canada’s tax laws, this form of depreciation is called capital cost allowance (CCA).
How to determine the difference between a current and capital expense
So, how exactly do you determine whether a cost is a current expense or a capital expense? The answer is you use your judgement with guidance from the CRA.
Below are the CRA’s criteria to decide whether an expense is current or capital. You can ask yourself these questions to help you figure out how to treat an expenditure.
- Does the expense offer a lasting benefit, or does it reoccur after a brief period?
- Does the cost enhance the property’s market value or only maintain it?
- Is the expense for a separate asset or the property itself?
- Is the market value of the cost high or low?
- Is the intent of the expense to make the property suitable for use or to perform regular repairs and maintenance?
- Is the cost incurred to help sell the property or to perform standard repairs and maintenance?
While asking these questions can help you make the right decision, you may encounter some grey areas. An expense could easily fit into both categories.
In such cases, it’s wise to consult with a tax specialist. Or, you can contact the CRA directly and have them make an assessment – that way, they’ll only have themselves to blame if they make a mistake!
You can deduct any current expenses related to your rental property in the year you incur them.
You can claim 100% of the expense if it pertains to a rental property that’s not your principal residence.
If the property is your principal residence, you can deduct the entire cost only if it’s related to the rental portion. Any expenses that apply to your entire home are only partially deductible. You’ll have to prorate the cost based on the square footage the rental part occupies or the number of rooms in your property.
Any money you spend advertising your rental property is an allowable expense, no matter the platform. You can place an ad in a newspaper, magazine, online rental website, billboard, etc. The total cost is deductible, as you incur it solely to earn rental income.
Office expenses include the cost of pens, paper, notebooks, printer ink and toner, stamps, sticky notes, staplers, paper clips etc. As long as you use these items strictly for business purposes, you can write-off them off on your tax return.
However, office expenses don’t cover desks, chairs, computers, and other higher-ticket items. The CRA considers these to be capital expenditures.
Utilities are one of the most significant recurring expenses you can deduct against your rental income. These include electricity, water, cable, internet, natural gas, and trash collection.
You’ll need to prorate these costs if your rental is your principal residence. Otherwise, you can claim the entire bill.
Repairs and maintenance
Any costs you pay for minor repairs and maintenance on your rental property are legitimate expenses. You can include the cost of materials, labour, and supplies. However, you cannot deduct your labour.
You can deduct property taxes your municipality has charged you for the current year. As with utility costs, you can only write off 100% of the bill if it pertains to a rental property. If you’re sharing your principal residence with a tenant, you’ll need to prorate the cost accordingly.
In addition, you can only claim the amount of your property tax bill for the period your property was available for tenants to rent.
Home insurance premiums are a cost that some landlords overlook, so ensure you take advantage of this one. You can claim the entire amount or a portion if you rent out your principal residence.
If your policy provides you with coverage for multiple years, deduct only the premiums associated with the current year.
Travel expenses cover the cost of commuting to your rental property. Most landlords will claim expenses associated with their vehicle, which can include things like:
- Leasing costs
- Registration fees
- License fees
Expenses related to board and lodging don’t qualify as deductions – the CRA views these are personal expenses.
To separate personal and business use of your vehicle, you’ll need to keep track of your mileage.
There are specific rules the CRA outlines that you must follow to deduct travel costs.
For example, suppose you own a single rental property. In that case, you can only write off your travel expenses if you visit the property to perform necessary repairs and maintenance.
The same rule applies if you own two more rental properties. However, in this case, you can also claim travel costs incurred where the purpose of your trip is to
- Collect rent
- Supervise repairs
- Carry out various management activities.
You may deduct money you pay for public transportation if you don’t owe a vehicle.
Visit the CRA website to learn more about travel and motor vehicle expenses. Or, better yet, give your accountant a call!
Interest and bank charges
Interest and bank charges are another category of expenses that’s easy to forget. You can deduct the interest charges you incur on money borrowed to purchase, renovate, or upgrade your rental property. You can also claim any fees associated with your loan, such as brokerage fees, appraisal fees, and processing fees.
In addition, you can claim interest charges you pay to your tenants once you return their security deposits.
You can fully deduct the cost of banking fees for chequing or savings accounts used strictly for your rental properties.
Any fees you pay for hiring a professional to perform a service related to your rental property are tax-deductible.
For example, you may hire a lawyer to help you draft lease agreements and an accountant to do your bookkeeping and prepare your tax returns.
Management and administrative fees
Do you pay an individual or company to manage your portfolio of rental properties? If so, these fees are a tax-deductible expense you shouldn’t overlook.
You can also claim any payments you make to a real estate agent to procure tenants or collect rent on your behalf.
Salaries, wages, and benefits
You can deduct amounts you pay to individuals you employ to take care of your rental property, such as maintenance workers. These amounts apply to salaries, wages, your portion of the source deductions (CPP and EI) and premiums for any benefits you provide.
- Landscaping costs – you can claim expenses associated with landscaping in the year you incurred the cost
- Lease cancellation costs – you can deduct the amount you paid to a tenant to cancel their lease
- Condo and strata fees – If your rental property is a condominium, you can deduct the monthly condo fees against your rental income.
- Renovations to accommodate individuals with disabilities – This may seem like a capital cost at first glance. But you can claim all expenses related to this type of project in the year you incur them.
You cannot deduct capital expenses as a lump sum in the year you incur them. Instead, you must write off the cost over several years by claiming capital cost allowance (CCA). CCA is a deduction made available by the CRA that reflects the declining value of an asset over time.
So how does CCA work, and more importantly, how much can you claim each year?
The CCA system divides capital expenses into 56 distinct asset classes. Each class dictates the maximum amount you claim as a deduction each year, usually as a percentage of the total cost.
Here are some of the more common capital expenses and the CCA class they belong to from a rental property standpoint:
A notable feature of CCA is that any new capital expense is subject to the first-year rule. With few exceptions, you can only deduct half of the capital expense in the year you pay for it.
For example, let’s say you purchase a new refrigerator for your rental property on October 1. You spend a total of $1,200.
As an appliance, this item falls under class 8 and qualifies for a 20% depreciation rate. As a result, your allowable CCA deduction for the year on the refrigerator would be $120 ($1,200 x 20% x 0.5). You can claim a full 20% deduction on the remaining $1,080 balance in the following years.
Here are some other rules that govern the CCA system:
- Land doesn’t qualify for a CCA deduction.
- You can’t use CCA to produce a loss on your rental property – only to bring your income to zero.
- You’re not obligated to claim your allowable CCA deduction in the current year. You can preserve them for future tax returns when it may be more advantageous for you to do so.
- Capital expenses include GST, PST, and delivery charges – don’t forget to add these to the total cost when computing CCA. You can also add legal fees, land transfer taxes, and mortgage fees to the total cost of a rental property purchase.
- Beware of claiming CCA on your primary residence, as you could lose your principal residence exemption. Speak to a tax professional before doing this!
CCA can be challenging to understand, so we don’t blame you if you feel overwhelmed studying it. There are many rules and nuances to become familiar with, which are beyond the scope of this article. The solution, as always, is to consult with a tax specialist.
Rental expenses you cannot deduct on your tax return
You cannot claim the following costs as a deduction against your rental income:
- Mortgage principal
- Land transfer taxes
- Penalties on your Notice of Assessment (NOA)
- Courses, books, seminars, and other education-related costs that relate to operating a rental property
- Value of your own labour
- Any personal portion of expenses (always make sure to prorate where necessary if you’re renting out your principal residence)
Our final thoughts
Knowing how to maximize your tax deductions is vital as a landlord. Otherwise, you risk paying more taxes than necessary to the CRA and earning a lower profit margin on your rental property.
Many rental expenses, such as utilities and office supplies, are easy to comprehend and calculate, and there’s no question you can claim them as a deduction.
However, you may encounter some that are more complex and fuzzier such as those surrounding travel costs and CCA. In these situations, it’s worth speaking with a tax professional or the CRA for clarification and guidance. Otherwise, you risk making a costly error on your tax return.
Pro tip: Ensure you keep detailed records of your expenses should the CRA wish to verify them. These include receipts, travel logs, invoices, and documents that specify ownership rights. You must keep these records for seven years from the tax year you claim them.
Some landlords are confident in sorting through their expenses when filing their taxes – they know what to deduct and how to crunch the numbers. However, if you’re not comfortable with this task, be sure to hire a tax professional. A qualified tax expert who can provide solid advice and file your tax return on your behalf is a worthy investment.
At SingleKey, we don’t offer advice on tax deductions to maximize your income. However, we help landlords protect their income through our Rent Guarantee program. This service covers lost rental income for up to 12 months, and up to $60,000 should your tenant stop paying rent. You also receive extra coverage for legal fees and property damage. And yes, the cost of the Rent Guarantee is a tax-deductible expense!