Property is one investment most Canadians make to earn high rent and live off that income throughout retirement. However, the rental income you earn is taxable. You must report rent and any other income such as salary, interest, dividend, or income from a side hustle you earn during the financial year. While you must report all your income, several tax credits and deductions can help reduce your taxable income. 

This article will discuss how you, as a landlord, can use rental expenses to reduce your taxable income and make the most from your property. 

How to Calculate Different Types of Expenses 

The Canada Revenue Agency (CRA) allows you to report rental income in Form T776. While you report income, you can deduct several expenses incurred on the rental property. It is important you understand the classification of expenses, as that will determine whether you can report them in their entirety or in a phased manner. 

Operating or Current Expenses: As a landlord, you incur several recurring expenses, such as property tax, insurance, advertising, legal and accounting expenses. These expenses ensure you get inflation-adjusted rent regularly. Hence, you can deduct the entire expense from your rental income. 

Capital Expenses: In addition to regular expenses, you undertake significant expenses to increase the property’s useful life or enhance its value. For instance, you may renovate the apartment and add more appliances. Since you spent a significant amount on the property, its value has enhanced. If you invested $10,000 in renovation in 2023, instead of deducting the renovation cost from rent, you will add it to the property value and depreciate it in the coming years. 

The CRA determines the depreciation percentage on different assets under the Capital Cost Allowance. If you expense the entire capital cost, the CRA might reject your claim, and you must pay tax on that amount.   

Prepaid Expenses: Sometimes, you may pay several years of expenses in one go, like home insurance premiums. Home insurance is not a capital expense as it does not enhance the property value. It is an expense to protect your property from several risks. You pay a one-time premium and get multiple years of coverage. However, you will report the entire premium in the year you paid it, even though its benefit is long-lasting. 

Interest: The CRA also allows you to deduct the interest expense you incur on any loans or mortgages you took on the property. Many people buy a property for investment and use the rent to pay the mortgage. In this, you can deduct the interest portion of the mortgage from the rental income. If you took a loan for renovation or any enhancement to the rented property, you can deduct the interest portion of that loan too from your rental income. 

Other Expenses Landlords Can Deduct from Rental Income 

In addition to the above expenses, some operational expenses can be tricky. 

Property Taxes: The CRA allows you to deduct property taxes from your rental income. However, if you rent your primary residence, you can only deduct your rented portion. For instance, you paid $2,800 in property tax and rented your garage, which is 20% of the house. You can deduct $560 (20% of $2,800) as property tax from rental income. This proportional expense applies to other expenses like utilities and maintenance. 

Speaking of taxes, land transfer tax paid during the purchase of that property is not deductible as a current expense but added to the cost of the property.

Repairs and Maintenance: When you incur repairs to restore the property to its original condition, they are categorized as current expenses. You can deduct them in the same year. The cost includes the labour and material costs you paid. However, if you undertook the repair yourself, you cannot deduct the cost of your own labour.

Sometimes, you undertake certain maintenance work to increase the life of the property. For instance, you replace the heating system with a new system. This expense improved the condition of the property. It will be treated as a capital expense. 

Management and Administration Fees: Being a landlord looks like a full-time job. Instead of doing everything yourself, you may hire a property management service to maintain the property and a real estate broker to find a tenant. The fees you pay them are deductible from your rental income. 

Travel: If your rental property is slightly far away and you have to travel there to collect rent, do repairs or do other administrative work, you can deduct the cost of travel (vehicle cost or public transport ticket cost). 

Unpaid Rent: If your tenant does not pay rent in a particular month, you can deduct the amount owed from your gross rental income. However, you should have some documentary proof to show to the CRA. A bank statement is not valid proof. You could send a letter to your tenant about non-payment of rent. 

It is not easy being a landlord. You have to keep records of several expenses, classify them accurately, calculate depreciation and keep all the receipts safe. You could consider outsourcing all this accounting to a professional and claim the deduction of the professional fee from your rental income. 

Contact McCay Duff LLP in Ottawa to Help You with Your Landlord Accounting Needs

A professional accountant can help you report all your incomes and expenses in a detailed manner with correct categorization. To learn how the team at McCay Duff LLP can provide you with accounting services, contact us online, or by telephone at 613-236-2367