How to Prepare Tax Returns For Rental Properties in Canada

Do you own a rental real estate property? Filing a tax return for an income property that you own in Canada can be a difficult process. Check out these 5 easy steps for preparing a tax return for your real estate investments.

1. Complete Form T776, Statement of Real Estate Rentals

Form T776 is used to report the income and expenses related to your rental property for tax purposes. It is an integral part of the tax return. The net income from your rental property calculated on form T776 should be entered on line 126 of your income tax return.

2. Calculate Expenses

The following criteria must be used when determining which expenses are deductible:
– Expenses should be incurred for earning rental income
– The amount of the expense should be reasonable

The most common expenses that can be deducted are:
– Bank charges
– Insurance
– Maintenance and repairs
– Utilities

3. Determine Rental Income

The Next step in preparing tax returns for rental properties in Canada is to determine the gross rental income.

1) The gross rental revenue earned in the year must be reported on Form T776. It is equal to the amount of rent payments received in the year, less prepaid rent received.

2) Prepaid rent is not rental income, but is a tenant deposit that you are holding onto, usually to be applied against the last month’s rent.

3) It is only recognized as revenue when it is applied to the month (usually the last month of the rental term), to which the prepaid rent relates.

4. Claim Capital Cost Allowance (CCA)

An important decision that you will need to make is whether t to claim cost allowance, also known as tax depreciation or CCA. The Capital Cost Allowance is an annual tax-write off, calculated as a percentage of the cost of the property (excluding land).

The following CCA percent (%) rates apply:
• 4% for residential properties.
• 6% for commercial properties.
• 10% for properties used in the manufacturing industry.

–> The advantage of claiming CCA: it reduces your taxable income from the rental property.
–> The disadvantage: at the time of sale, all of the previous CCA claimed must be recaptured into taxable income and is therefore subject to tax.

5. Capital Gain or Terminal Loss

When you sell your rental property, you will either have a capital gain or a terminal loss. Half of a capital gain is taxable. When there is a loss on the property, it is recognized as a terminal loss and is entered on form T776, it is fully deductible. A capital gain is reported on schedule 3 of the tax return, and is also entered on line 127 of the return.  The capital gain is calculated as followed: (1/2) x (The sales proceeds [after commissions and legal fees] in excess of the original cost of the property plus improvements).

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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