Real Estate Tax Planning in Canada
Allan Madan, CA
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
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CA.CPA.CGA
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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Where goes the border between international corporat tax planning and tax fraud, or is it constantly moving as laws are changing?
Yes, you’re correct. The laws are always changing, so it’s important to be current and well informed.
Allan
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We are very happy to hear we were helpful !
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The Team at Madan CA
Good afternoon
If I rent my detached home while living in say the master bedroom or basement do I still pay capital gains?
If so how is it calculated?
Am I better off not living in it and renting the while detached home?
Hello Alex,
This has more to do with the rental income than capital gains. Capital gains occur when selling a property for a profit. To properly calculate this, you need to figure out the percentage of the house that is considered rental property and personal use. For example, if your master bedroom is 100square feet and the total house is 1000square feet, 10% of the property is for personal space and 90% for rental.
You will want to fill form T776 Statement of Real Estate Rental. This form allows you to claim a portion (90%) of expenses that you incur to run the rental property including maintenance, property taxes, insurance and utilities among others.
If this is considered your principal residence, and you have started rental operations, there is a change in use. This means that the portion of the property that relates to personal use is deemed to be sold at fair market value. This could trigger a capital gain if the property has appreciated in value. You can claim the principal residence exemption to exempt the capital gain on the change in use from tax.
Is property insurance included in the deductible as well?
Hi Mark,
Property taxes are a deductible expense and reduce rental profits.
Thanks,
Allan Madan, CPA, CA
If i purchase a fix upper RE property through a newly created holdCo and sell the property before one year what will be the tax implications?
Thank you in advance,
Hi Al, thank you for your question. The corporation will record a profit on the sale, which will be classified as ‘active business income’. The combined provincial and federal corporate tax rate will be 15% on the profit made.
Hi,
Thanks for these advises.
I have 2 questions, your response will be greatly appreciated.
1.Wouldn’t claiming CCA for a rental property trigger a recapture of CCA in case you decide to sell the property one day?
2. I bought a second property recently and I designated it as my primary residence. I rented out the existing house, 100%. If one day I sell my primary residence and decide to take over my investment property (old house) as my primary residence, what would the tax implication be?
thanks in advance
Hi Lin, you are correct. When you sell your property, any CCA claimed from the date of purchase to the date of sale will be recaptured into your income and will be taxed at your marginal tax rate at that time. However, the advantage of claiming CCA now is that you will save tax now. Due to inflation, a dollar saved in taxes today is worth a lot more than a dollar spent in taxes in the future. Therefore, I recommend that you claim CCA every year, but invest the tax savings realized from claiming CCA. If you invest wisely, your savings will be much more than the tax you have to pay for the recapture of CCA in the year of sale.
If you move back into your rental property, there will be a change in use at that time. As a result, any appreciation in the property from the date that it became a rental property to the date that you move back in will be taxable to you as of the date you move back in. To avoid this capital gain, consider electing under subsection 45(3) of the Canadian Income Tax Act. This election allows you to treat your rental property as though it was your primary residence for up to 4 tax years prior to the year that you move back in. For example, assume that you began renting your property in the 2018 year, and then you move back in to that property in 2022. By electing under subsection 45(3), you can treat your rental property as your primary residence for the 2021, 2020, 2019 and 2018 tax years for the purpose of the principal residence exemption.
For real estate brokerage, does the money in the commission trust account taxable?
Hi Patrick,
If the sale is complete, and the commission has been paid to the brokerage, then the commission received is taxable to the brokerage, even if it’s kept in a trust account.
What happens when you’ve claimed CCA for 27 yrs and then sell the property? How do you get taxed ?
Hi Eric,
CCA claimed in previous years is included in your income in the year of sale.
Hi, if I have a HELOC or Mortgage (borrowed money) used to purchase a rental property, and the loan includes cost of rental property (purchase price) and closing costs, legal fees, etc… all rolled in, is the interest on the total loan tax deductible, or just the purchase price of the property?
Hi Glenn,
The entire amount of the interest paid is tax-deductible in your case.
Hello, great summary here thank you!. We recently purchased a condominium that will be completed in the next 3 to 4 years. We have paid roughly 25k to date using cash money. Retrospectively wondering now if we should be using our HELOC and deducting the interest. My question, can you deduct interest on an investment property before ever having a title to an investment property?
Hi Glenn,
The interest expense incurred prior to the purchase of a rental property is non-deductible.