If you own a rental property, the Canada Revenue Agency requires you to pay taxes on rental income earned from that property. However, you are allowed to deduct expenses from your rental income, depending on the ownership structure of your rental property.
How much tax do you pay on a rented property?
On average, you’ll pay between 20% or 40% tax on your net rental income, depending on your personal circumstances (marital status, how much you’re charging tenants, whether you have other forms of income, etc).
Is rental income considered earned income?
No. It is not classified as earned income, but it is still reportable and taxable.
Examples of rental income
- Renting out a bedroom in your house
- Renting out your basement
- Renting out a condo unit or house you own
What Expenses Can I Deduct?
There are a couple of things you are allowed to deduct from your rental income for taxation purposes. The costs you incur to manage and maintain your rental property are also deductible. This applies even if the property in question is temporarily vacant.
- General cleaning and maintenance
- Advertising costs
- Local property taxes
- Mortgage interests
- Insurance premiums
- Management fees and office expenses
- Specific travel/vehicle expenses
- Garbage removal fees
It’s challenging to track everything all year round. From when you first look at rental real estate to when you are actually renting it out, there are a lot of things to keep track of.
Most landlords and corporations, therefore, opt to outsource the work to a tax accountant as they are conversant with the entire process.
When Do I Submit Tax On Rental Income?
You are supposed to report all income on your tax returns for the year you receive it. For example, if you collect the rent for January 2020 in December 2019, you have it report it as income on your tax returns for 2019.
When you get a deposit for the first and last month’s rent, it must be taxed in the year you receive it, however, if you plan to return the security deposit to the tenant at the end of a lease, then don’t include it as income.
If a tenant presents you with goods and services in exchange for the rent, you have to report their value as rental income when submitting tax returns for the year you received them.
How Much Rent Income Is Tax Free?
No rental income is tax free in Canada because it is taxed according to how you have structured the ownership of the business. In some cases, some of your rental income will end up being tax free because of the deductions placed against it by other costs of operation, but the rental income itself is never considered to be tax free.
How Do I Avoid Paying Tax On Rental Income?
It is illegal to avoid or skip paying taxes on rental income without cause, however it is possible to use tax credits for your business as well as legal deductions to lower the tax burden you or your business faces.
The best way to ensure your business is properly organized to keep your tax rates as low as possible is to work with a CPA. Choose a CPA that is familiar with real estate taxation laws and who can truly make a difference in your business.
Is Rental Income Considered Other Income?
Generally, rental income is considered to be personal, other income when filing your taxes in Canada. If you are collecting rental income through a business or through property management, however, the money should be considered to be self-employment income rather than other income.
Do non residents pay tax?
Nonresidents earning income from the rental of Canadian real estate are generally subject to 25% tax on gross income, withheld by the tenant or the property manager. The payment of the 25% withholding tax is generally considered to be the non-resident´s final tax obligation to Canada.
Rental property is a great investment, and its worth working with a good property manager to ensure you get a market related rental, as well as keeping the property rented long term and it not standing empty for long periods of time.
How Do You File Taxes On Rental Income?
If you are the sole-proprietor of your rental property, the tax rate for all rental income will be the same as your personal marginal tax rate. If you own properties in partnership with others, the income will be split between all of you, and each person will pay on that income at their applicable tax rate.
Individuals filing their taxes on rental income should use this form.
If the properties are held through a business, the tax rate will depend on the location of the business and what type of business it is. The national tax rate for rental income is a federal rate of 38%, and each province has its own tax rate as well.
Consequences of Not Disclosing Income
Dealing with a CRA audit can be a very stressful situation. Not disclosing any type of income can result in numerous consequences.
- Interest Accrual: Any tax owing from income that had been unreported can be subject to interest. This interest is calculated from when the income should have been reported and can easily total up to a large sum.
- Penalties and Fines: CRA has the ability to charge penalties for late filing. This amount is also backdated to the time when the income should have been reported. Interest is calculated on the penalty itself as well. Not reporting income to CRA is a form of tax evasion; this can result in extremely large fines making re-payment difficult. Failure to report income can result in a number of different penalty categories with CRA:
The first being the “Failure to Report Income Penalty”. This penalty simply charges 10% of the total amount you failed to report on your tax return. Interest is compounded daily on this amount backdated to the date owed.
The second category this may fall under is “False Statements or Omissions Penalty”. This penalty is commonly known as gross negligence. If CRA deems you to have falsified your tax return they have calculated the following gross negligence penalty:
The greater of:
50% of the understatement of tax and/or the overstatement of credits related to the false statement or omission.
If any non-disclosed amount is voluntarily reported to CRA you may qualify for the “Voluntary Disclosure Program” which could waive you of any penalties. If you find yourself in a situation like this, consult with your professional accountant to determine the best course of action.
If your rental property is a portion of your home (principle residence) you need to ensure no capital cost allowance (CCA) is taken. A principle residence is exempt from capital gains, a great advantage when holding a property and selling for a profit. By claiming any amount of CCA on your property, you may not be able to claim it as a principle residence and therefore not be exempt from capital gains when selling.
In the case of a second property, you can claim CCA, which in turn reduces your taxable income related to your rental property. When a rental property, that is not your primary residence is sold, you must report capital gains earned on the sale. Failure to report capital gains will result in severe taxes and penalties from CRA.
Withholding income from CRA can not only cause you trouble, but can also leave you missing valuable deductions. Before you get a knock on the door from the taxman, speak with your accountant to help with important tax planning.
You can also hire a good property management company to manage your income generating property and ensure great results