Taxes For Landlords Part 1
As T4s start arriving in the mail for those of us who had employment income, it’s also time for us landlords to begin gathering up the necessary documents to file our annual income tax returns.
Any Canadian who earns income from rental properties must file T776, or Statement of Real Estate Rentals. If you’ve kept your books up to date throughout the year, this should be a fairly easy task, but there are a couple of items that still need some figuring out at year end.
Note: Tax laws can be quite complicated, that’s why it is important for you get advice from a tax professional whenever you’re not completely sure of something.
I use a chartered accountant to prepare my annual tax return, but to minimize my account’s bill each year, I do most of the grunt work by preparing some of the supplementary statements, the main one being the T776.
T776 Statement of Rental Income:
You can download form T776 directly from Canada Revenue Agency’s (CRA) website. They also have a guide that you can view here. I created an Excel version of form T776 for myself to make it easier to export data from my accounting software. Most of the line items on the T776 are straightforward, but there are a couple I feel are a little less so. My financials are more detailed than is necessary for this form, so in some cases I have to combine several lines into one. For instance, under maintenance I would have repairs, but also snow plowing, lawn care, etc, but the T776 lumps them all together.
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Insurance:
You can deduct the premiums for insurance coverage on your rental property for the current year. If your policy gives coverage for more than one year, you can deduct only the premiums that relate to the current year. Deduct the remaining premiums in the year to which they relate.
Interest:
You can deduct interest on money you borrow to buy or improve your rental property. You can also deduct interest you paid to tenants on rental deposits. The principle portion of loan payments are not deductible (but they may be depreciable). Other fees related to borrowing may or may not be deductible. Consult the guide, or a tax professional for more information.
Office expenses:
You can deduct the cost of office supplies. These include small items such as pens, pencils, paper clips, stationery, and stamps.
Legal, accounting, and other professional fees:
You can deduct fees for legal services to prepare leases or collect overdue rents. If you incur legal fees to buy your rental property, you cannot deduct them from your gross rental income. Instead, allocate the fees between land and building and add them to their respective cost (the legal fees you paid when selling your rental property are deducted from your proceeds of disposition when calculating your capital gain or loss).
You can also deduct amounts paid for bookkeeping services, audits of your records, and preparing financial statements. You may be able to deduct fees and expenses for advice and help to prepare your income tax return and any related information returns. You can deduct these fees if you needed the help because of your rental operation.
Management and administration fees:
You can deduct the amounts you pay for managing the property. You can also deduct amounts paid or payable to agents for collecting rents or finding new tenants.
Maintenance and repairs:
If you pay for repairs to your property, you can deduct the cost of labour and materials. However, you cannot deduct the value of your own labour.
Salaries:
If you pay for repairs to your property, you can deduct the cost of labour and materials. However, you cannot deduct the value of your own labour.
As an employer, you can deduct your portion of Canada Pension Plan or Quebec Pension Plan contributions, Employment Insurance premiums, and workers’ compensation board amounts.
You can also deduct any premiums you pay for an employee for a sickness, accident, disability, or income insurance plan.
Sometimes I buy meals for people who help me out with various small jobs, but I’d bet that CRA would consider that a taxable benefit to them, so I don’t bother deducting them.
Payroll can be a very complicated area of business, so if you’re not sure what rules apply to you, then my advice is to seek the advice of a tax professional and find out what your responsible are.
Property Taxes:
You can deduct property taxes, assessed by a province or territory and by a Canadian municipality, that relate to your rental property for the period when it was available for rent.
One thing you should note here is that if your mortgage company collects funds for property taxes and pays them on your behalf, then the amount they collect is not your actual property tax expense. Rather those funds should be allocated to a “Prepaid Taxes” account, and they become an expense when the bank pays the municipality on your behalf. Your bank will send you an annual mortgage statement, and the actual tax expense should be listed on that.
Travel:
You might travel to collect rents (if you own two or more properties), supervise repairs, and manage your properties.
Utilities:
You can deduct expenses for utilities, such as gas, oil, electricity, water, and cable, if your rental arrangement specifies that you pay for the utilities in question.
My electricity is billed every two months, but I set up monthly budget payments. The monthly payments go into a “prepaid expenses” account and the expenses come out of that account when I’m billed every two months.
Motor Vehicle Expenses:
You can deduct motor vehicle expenses in the following circumstances:
If you own one rental property:
You can deduct reasonable motor vehicle expenses if you
meet all the following conditions:
– you receive income from only one rental property that is in the general area where you live;
– you personally do part, or all, of the necessary repairs and maintenance on the property; and
– you have motor vehicle expenses to transport tools and materials to the rental property.
You cannot deduct motor vehicle expenses you incur to collect rents. These are personal expenses.
If you own two or more rental properties:
In addition to the expenses listed above, you can deduct reasonable motor vehicle expenses you incur to do any of the following:
– collect rents;
– supervise repairs; and
– generally manage the properties.
This applies whether your rental properties are located in or outside the general area where you live. However, your rental properties have to be located in at least two different sites away from your principal residence. The motor vehicle expenses that we consider to be reasonable depend on the circumstances of your situation.
Let’s say you drove 30,000 kms in a year, and 6,000 kms were related to managing your properties, then 20% (6,000 / 30,000) of your driving was related to earning rental income. Therefore, you should be able to deduct 20% of you total motor vehicles expenses.
You have to follow a couple of rules in order to do this, however. You must record the odometer reading at the start and end of the tax year in order to come up with the total kms driven throughout the year. You must also record the kms you drove to manage your properties in a daily log. You must have receipts for all of your motor vehicle expenses, such as: fuel and oil, license and registration, insurance, maintenance and repairs, and the interest portion of finance payments (you can’t deduct the principle portion, but you can depreciate it).
I try to use the same credit card for all of these types of purchases so I can verify the totals at year end. You can buy a handy little log book designed especially for this and you can record everything in there.
Other Expenses:
On this line, include the total amount of other expenses you incur to earn rental income and that you have not included on a previous line of Form T776. Some of these items might include landscaping costs, lease cancellation payments, and condominium fees.
Next Time:
That brings us to the “Net income before adjustments” line, and we’ll talk about what comes after that next time.
