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Canadian Tax Tips for Property Owners & Investors

Canadian Tax Tips for Property Owners & Investors

Own Real Estate in Canada? Whether it’s your principal residence or an investment property, we have a number of tax tips for home owners. If you haven’t yet submitted your 2016 tax return, here are a few tips that may help you.


Canadian Tax Tips: Reporting Rental Income

Do you own an income property or rent out a portion of your principal residence? The first question that most new landlords have is whether rental income is taxed as rental income or business income. The distinction matters as these two types of income are reported differently on your tax return and are taxed at different rates.

Rental income is reported on form T776, Statement of Real Estate Rentals and your net annual income must also be declared on line 126 of your return. You can then deduct qualifying expenses. The difference between the two lines becomes your gross rental income, recorded on line 160. If your rental operation is considered to be a business, don’t use the rental guide and related forms. Instead, see Business and Professional Income for guidance as your earnings will be taxed as business income. The filing due dates are also different. Rental income recorded on T776 is submitted with your personal tax return, due by April 30th, whereas business income is filed separately, due by June 15th.

So, which applies to you? In their Rental Income Guide, the CRA defines the difference as dependent on the number and types of services you provide for your tenants:

In most cases, you are earning an income from your property if you rent space and provide basic services only. Basic services include heat, light, parking, and laundry facilities.

If you provide additional services to tenants, such as cleaning, security, and meals, you may be carrying on a business. The more services you provide, the greater the chance that your rental operation is a business.

While business income will be taxed at a higher rate than rental income, one benefit is that you may be able to write-off more if you’re set up as a business. This is where tax law becomes much more nuanced. If you’re a landlord–particularly if you’re a new landlord who is filing rental income for the first time–we highly recommend that you seek the services of a savvy Accountant with a high-level of Real Estate experience to ensure that you’re maximizing the deduction benefits available to you in order to minimize your tax obligations.

Filing on your own? Know that allowable expenses may include such things as advertising for new tenants, maintenance and repair costs, utilities, property tax and/or mortgage costs. Sometimes it’s a weighted percentage of these expenses, as in the case of a principal residence that also includes a rental unit; for example, an owner-occupied duplex or house with a basement apartment.

For further info, the CRA has created a list of all deductions available to offset rental income and, if you’re selling, capital gains for the year that you sell the property.


Sale of an Income Property

If you sold an income property last year, you may owe capital gains tax. The details of your rental sale must be recorded on Schedule 3. What are you taxed on, exactly? If you sell your income property (or any property that’s not your principal residence) for more than you originally bought it for, that difference is a capital gain and it’s taxable. You may be eligible for a long list of deductions however that will minimize the tax owing.

If you lose money on the sale (rarely the case in this market but it does happen), then you can report a capital loss. Generally, this amount doesn’t come back to you in cash rather it can be used to offset capital gains tax owed elsewhere (i.e. you won’t get a refund for a capital loss but you can use it to reduce any other capital gains tax owed).

Where capital gains on the sale of an income property becomes more nuanced is when the rental unit is part of a larger building that is also your principal residence. For example, a homeowner may rent out a room or a separate unit within their own home. The CRA provides an example online to help you calculate capital gains in this instance.


Taxes Owed on a Second Home or Cottage

If you sell a second home that is not your principal residence, you may owe tax. The first step is to figure out whether it qualifies as a personal-use property or a rental property. If you rent it out for all or part of the year, then the rules for rental income and/or business income, as outlined above, will likely apply. If, however, the property is strictly for personal enjoyment, you won’t be taxed until if and when you actually sell the property. When the property is sold, capital gains tax will likely apply.

Sometimes a tax payer will designate their cottage as their primary residence versus their urban home. This can be beneficial if the cottage is valued higher, leading to higher capital gains upon sale. Married or common law couples may be able to put individual names as owners on each of the two properties at time of purchase, mitigating capital gains down the road. Again, working with a professional Chartered Accountant will ensure your deductibles are maximized.


First-Time Home Buyer Rebate

If you’re a first-time buyer, you may be eligible for up to $5,000 in rebates. To qualify for the First-Time Home Buyer’s Tax Credit, neither you nor your partner (if you're purchasing with a spouse of common-law partner) can have owned a home that you lived in within the last four years. You can claim $5,000 towards this credit. The calculation uses that $5,000 multiplied by the lowest federal income tax rate for that year. So, for 2016, the lowest personal income tax rate (federal) is 15% and so you may be eligible for:

15% x $5,000 = a credit of $750

More information on the First Time Home Buyer’s Tax Credit is available on the CRA website.


Land Transfer Tax (LTT) Refund

First time home buyers may also receive a refund from the Provincial government of up to $2,000 of the land transfer tax they paid on their first home purchase. This is deducted from the Provincial portion of the LTT levied; some of the other Provinces have similar programs.

Even better news for first time buyers purchasing after January 1, 2017: the Liberals have doubled the LTT rebate moving forward. Eligible first time home buyers in Ontario will no longer pay LTT on the first $368,000 of the purchase price of their first home which represents a savings of up to $4,000 for the 2017 tax year.


Selling Your Principal Residence

We talked earlier this week about new tax criteria, recently introduced, that requires all Canadians to report the sale of their principal residence from 2016 onward. This is one move by the Federal Government, working with the CRA, to crack down on tax-dodgers, specifically, investors and flippers who have not been paying capital gains or business income tax.

Does this mean that you’ll have to pay tax on the sale of a principal residence? No, providing it was your principal residence for every year that you owned the property. The principal residence tax exemption still applies but you now have to report the sale of your home using Schedule 3, regardless.

It is critical that you report this as late fees can be steep. The late-filing penalty is $100 / month for every month that you’re late, up to a maximum of $8,000.


Buying a New Build Property | HST Rebate

Although this isn’t tied to your personal tax return (you apply for this separately), we’d like to remind buyers of this rebate that’s available to you if you purchased a new build home and had to pay HST. In Ontario, buyers of new build homes and condos–or substantially renovated homes, to the extent that they could be considered "new"–have to pay 13% Harmonized Sales Tax (HST) but may be eligible for a rebate on a portion of that tax.

You can apply for an HST rebate providing that both of the following statements apply:

-you or your spouse or common-law partner acquired a qualifying home; and
-you did not live in another home owned by you or your spouse or common-law partner in the year of acquisition or in any of the four preceding years (first-time home buyer).

The second point is critical–you must move into the property to qualify, i.e. it can’t be an income property rented to tenants as is often the case with pre-construction condo purchases, for example. How do you apply? Sometimes the developer applies for the HST credit directly on your behalf (particularly in the case of multi-unit buildings); other times, individuals have to apply themselves.

If your builder is handling this, they may either pay you the total amount of your new housing rebate in a separate transaction OR they may simply credit that amount against the total, remaining amount owed on your home. The latter is often the simplest route from a buyer’s perspective, i.e. have the builder deduct the credit from what remains to be paid on your home purchase. Just make sure that this happens and that the numbers all jive.

If you’re applying for the rebate, you have up to two years from what’s known as the “base date” to apply. The base date is the date that the construction or substantial renovation is considered to be substantially complete.

How does one define “substantially complete”? Generally, it means that the new build property is fit for occupancy and can now be used for its intended purpose. This is, however, often a grey area between builders and buyers. If you need guidance on whether or not your property is truly “substantially complete”, you can consult with Tarion, your lawyer and/or your REALTOR; you should always use a REALTOR® to purchase a pre-construction property as these transactions can be higher risk than a standard property purchase and it won’t cost you any more to bring your own representation to the table.

More information on the GST/HST New Housing Rebate is available on the CRA website.


But Wait… There’s More!

Buying a home for sale in Toronto this year or upgrading your existing property? Make sure to also familiarize yourself with these home rebates and buyer incentives.


Lead image: Tax Tips by Yury Zap from Shutterstock.