21 Jan 5 Tax Tips All Ontario Landlords Should Know to Stay Tax-Efficient
As a landlord in Ontario, you should understand how renting a property can affect your taxes. Every cent your rental property earns is taxable, which is why it’s vital that you treat your property like a business.
Failing to report your income properly may lead to tax headaches, fines, and even legal action. You may also end up missing out on strategic tax deductions if you don’t calculate your business expenses in an efficient manner.
We’ve created this basic list of tips to help Ontario landlords ensure that they submit their taxes properly, so they can keep more of their money in their pocket.
1. Understand How is Rental Income Taxed in Canada
If you own a rental property in Ontario, provide basic services, and earn income from rent, chances are, you are earning rental income. However, if you provide additional services such as cleaning, security, or meals, you may actually be operating a business. If you are operating a business, your taxes will be calculated differently.
There are three different ways that rental income is taxed in Canada.
- The rental property is owned in your name. If this is the case, you will pay tax on your rental income on your T1 personal income tax return. The tax rate will depend on your personal marginal tax rate.
- The rental property is held in several partners’ names. If you have a partner or partners, each partner must account for their share of the rental income on their personal tax returns.
- The rental property is held in a corporation. This is where taxes become more complicated as multiple factors need to be considered to determine the rate. Find out more here.
Be sure to find out which category you fall into by consulting with a professional accountant.
2. Know When Your Tax Year Starts
In most cases, you will need to report your rental income on the tax returns for the year you receive the money. If you receive rent in December 2020 for January 2021, this income will count towards your 2020 tax return.
In the same vein, any deposits you receive should be claimed in the year you receive them. However, if the deposit is being held to be returned to the tenant, you will not need to pay tax on this amount.
Any business expenses you claim must be claimed within the relevant tax year that they happened. If you plan to invest in a larger renovation, you should look to see whether its best to do it in the current or next tax year to maximize your tax savings.
3. Receiving Goods and Services in the Place of Rent
In the rare case that you accept goods or services from your tenant instead of rent, you will need to claim the value of these services on your tax return in the same year that you receive them.
This is a complicated process that may involve appreciation and depreciation. If that is the case, you should consult with your accountant to ensure that you are claiming these things properly.
4. Statement of Real Estate Earnings (Form T776)
If you are the sole owner of the rental property and your rental income is being taxed on your personal tax return, you will need to fill out a Statement of Real Estate Earnings for each rental property you own. In this form, you will summarize your rental income along with any deductions of expenses associated with this income.
The form will ask for identification, details on co-owners, income, expenses, and finally, a calculation of capital cost, or CCA.
You can find this form online by following this link.
5. Keeping Track of Your Rental Expenses
Your rental income amount isn’t usually the amount you need to pay taxes on. This is because you are allowed to claim expenses that are deducted from this amount. There is a wide range of accepted expenses. In theory, any cost associated with the legal upkeep of the rental property can be deducted. Some examples include:
- Cleaning and maintenance
- Marketing costs
- Property management fees
- Garbage removal fees
- Mortgage interest
The best way to track your expenses throughout the year is to enlist the help of a tax accountant who will ensure you make no costly mistakes or omissions from your list. Plus, you’ll be guaranteed to make no errors on your tax return that could get you into legal trouble later on.
It is, however, possible to keep the receipts and proof of purchase yourself. An accountant will still be required by CRA to classify your expenses at the end of the year.
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Taking on all of the jobs that fall on a landlord’s shoulders can be overwhelming. With the help of a property manager, you can let a professional handle the day-to-day running of your rental property. Along with the daily maintenance and repairs calls, our team of property managers at Del Condominium Rentals will take care of minor legal disputes, tenant evictions, marketing, and some accounting practicalities.
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