Real Estate Tax Planning in Canada

What should you know about tax when it comes to investing in real estate?

As an Accountant in Mississauga and avid real estate investor, I have disclosed the tax secrets to real estate investing, below. By using these tax secrets, you’ll certainly save a ton in tax.

Should you Incorporate Real Estate Investments – Real Estate Tax Planning Canada – Accountant Mississauga

“The first thing that you need to know about real estate tax planning in Canada is whether or not you should incorporate,” says Allan Madan, Accountant Mississauga.

The advantage of holding your real estate investments inside a corporation is that a corporation offers a Limited Liability Protection. That means that in the event of a lawsuit, your personal assets such as your home, your automobile and other personal belongings would not be at risk in the law suit.

It can happen, where a tenant may slip and fall on a property that you own and sue you because of negligence. Maybe the driveway wasn’t clean or there was some obstruction.

If you were unincorporated (meaning you held the real estate investments directly), then you would not have Limited Liability Protection. Therefore, the person who slipped and hurt themselves on your property could after your personal assets in a lawsuit.

Income Taxes – Real Estate Tax Planning Canada – Accountant Mississauga

The second thing that you need to know about real estate tax planning in Canada is the tax rate applicable to real estate income.

“Tax savings do not result by holding real estate in a corporation”, says Allan Madan, Accountant Mississauga.

The reason being is that the government of Canada has levied a very high tax rate on rental income earned by corporations, being 48%. This is almost the same tax rate for individuals who are in the highest marginal bracket.

So if you are earning less than a $120,000 per year, you are better off from a tax perspective to hold the investments personally rather than to incorporate. At earnings of $120,000 or more, you’ll pay approximately the same amount of tax on your real estate income, whether or not you incorporate it.

Capital Cost Allowance – Real Estate Tax Planning Canada – Accountant Mississauga

“The third thing that you should about real estate tax planning in Canada is Capital Cost Allowance, which is also known as tax depreciation,” says Accountant Mississauga, Allan Madan.

Capital Cost Allowance, which is tax deductible, represents the wear and tear on the building portion of your real estate investment.

The rate for calculating Capital Cost Allowance is 4% of the cost of the building.

So let’s say that you bought a townhouse for $200,000. After hiring an appraiser, you determined that the land was worth $100,000 and the building portion of the townhosue was worth $100,000. In this case, you would be able to write-off $4,000 (i.e. 4% x $100,000) on your tax return for Capital Cost Allowance.

Capital Cost Allowance is a significant tax deduction that can shelter rental income from taxation, and you should strongly consider claiming it.

Capital Gains Tax – Real Estate Tax Planning Canada – Accountant Mississauga

“The fourth thing you should know about real estate tax planning in Canada is what happens when you sell your real estate holdings,” says Allan Madan, Accountant Mississauga.

When you sell your real estate holdings in Canada you will pay Capital Gains Tax. That means the gain earned on your real estate investment (the gain being the sales price minus the purchase price) will only be 50% taxable.

Individuals, who are in the highest tax bracket of 46%, will only pay 23% of tax on the gain when they sell their property.

Income split with family members – Real Estate Tax Planning Canada – Accountant Mississauga

“The fifth thing that you should know when it comes to real estate tax planning in Canada is how to income split with your family members,” says Allan Madan, Accountant Mississauga.

For example, let’s say you purchased a house that you plan to rent to tenants, and you consulted a Chartered Accountant in Mississauga. You were advised to purchase the house jointly with your spouse. By doing so, both you and your spouse can split the profits from the rents on a 50/50 basis. This is much better tax strategy compared to buying the house solely in your name and including all of the income from the house on your tax return.

Tax Deductions for Real Estate Investments – Real Estate Tax Planning Canada – Accountant Mississauga

“The sixth thing that you should know about real estate tax planning in Canada is what expenses are tax deductible,” says Allan Madan, Accountant Mississauga

For rental properties in Canada, the most common expenses that are deductible include, but are not limited to:

•   Capital Cost Allowance
•   Repairs and maintenance
•   Interest
•   Property taxes
•   Utilities
•   Capital improvements, which can be written off over a period of time.
•   Management fees paid to a property manager

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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