Canada: Real Estate 101: Residential Rental Properties

Overheard at Crowe Soberman is a series of blog posts and videos where we talk about the things we discuss around the office and with our clients, except with the cameras or recorders on. It's sort of like going out for coffee with one of our Crowe Soberman experts, but without the caffeine jitters. Feel like you need more? Connect with our author below.

It's no surprise that residential rental markets across Canada, especially in Ontario, are red hot. The demand for rental units is overwhelming with renters accounting for over 30 per cent of Canadian households. For those fortunate enough to have investment capital, becoming a landlord has become a lucrative investment opportunity. We sat down with Audit & Advisory Partner and Real Estate & Construction industry expert, Chandor Gauthier, to discuss how residential rental landlords can proactively plan and ultimately save money, rather than trying to fix issues after they arise.

What are the different ways to own property?

When you are buying real estate, there are a few different ways you can own it:

  • Personally
  • Through a trust
  • Through a corporation
  • Through a partnership
  • Through a joint venture or co-tenancy arrangement

Each of the structures comes with its own advantages and disadvantages. It's important to talk with your advisor to understand which structure works best for you, based on your short-term and long-term goals. For example, your short-term goal could be to rent it out but long-term you will want to live in it. Or your goal could be to rent it out for a few years before selling and using the funds for another investment. It's essential to consult with a professional to help you make the right decision before you purchase the property. Fixing things after the fact can be much more costly than getting it right the first time around.

How can I finance a rental property?

Once you've decided that you're going to purchase a property, you need to figure out where the money is going to come from. This could be existing personal funds, a mortgage or other types of bank financing, or bringing in a partner. How you plan to finance the purchase may play a role in your structuring decision, and vice versa. Consider what the bank or outside lenders are going to request as security. The property itself might not be sufficient, especially if you don't have a history of property purchases or other personal security. Also, if you plan to hold for only a few years, you will want to consider how flexible the repayment terms are.

Do I need insurance?

Liability coverage insures you if you're responsible for damage or injury to a person or their property. For instance, if the property is located where there tends to be severe weather, consider insurance that will cover possibilities like a slip and fall. If a tenant is injured this way, liability coverage would protect you in the case of a lawsuit. Property coverage can insure the building, building upgrades, equipment, etc. Severe weather can be a concern for a slip and fall but also damage to your property. Ensuring you have adequate insurance coverage is essential. Talk with your insurance provider about how much and what types of insurance you should consider.

What about leases, rent increases and special provisions?

As a landlord, you want to follow the laws and regulations in your jurisdiction. Consider items such as legally enforceable lease clauses, permitted annual rent increases, etc. In Ontario, the Landlord and Tenant Board (LTB) acts as the regulatory body that provides information to landlords and tenants about their rights and responsibilities under the Residential Tenancies Act. In some instances you may be able to increase rent beyond the guideline amount. For example, where there are improvements to the rental unit or the property itself. Consult with the LTB about whether a rent increase above the guideline amount is permitted in your situation and to ensure you complete any necessary documents. For lease and property purchase agreements, we recommend consulting with a lawyer.

Where can landlords get help when there is a tenant dispute?

There is a possibility that you're going to have unhappy tenants at some point – either with the rent they're paying or something that's happening in the unit. The tenant might withhold rent as a result of their frustration with the situation. You have to be careful as a landlord. The solution is not as simple as evicting the tenant. Though you might not need to talk to a lawyer right away, it is something to consider.

One of the mandates of the LTB is to resolve disputes between landlords and tenants through mediation or adjudication. The LTB has resources available to landlords which will help determine what to do in case of a dispute.

What is considered a capital item?

As a landlord, some of your major cash outflows are going to be for repairs and maintenance. As these costs are incurred, consider whether it is a repair/replacement or a betterment. Is it going to extend the life of your property? Is it a separate asset?  A new fridge or stove, for example, is a separate capital item. A fresh coat of paint would fall under repairs and maintenance. Your accounting professional will be able to provide guidance as to whether an amount is a capital item or an expense. 

Which expenses are deductible?

First of all, consider using a separate bank account and credit card to ensure all cash inflows and outflows can be tracked accurately. Costs like painting, plumbing repairs, and new appliances are likely already on your radar. Another expense to consider is depreciation. You are allowed to take a portion of the cost of capital items (like the rental building and appliances) into your expenses over time as depreciation to the extent that you have rental income. 

What about the use of your personal vehicle to drive to the property to supervise work or meet with the tenant? Or costs related to the purchase and financing – legal fees, financing costs, and ongoing interest payments? For example, let's say you set up a new company to purchase the property but obtain personal financing. You put the cash into the company for the property purchase. You likely paid financing fees personally to the bank and will pay interest on that financing from your personal bank account. You want to ensure these cash outflows are captured in the company and reimbursed to you personally. Talk to your accounting professional to make sure that all cash outflows are being captured. 

What if you purchased a house and decided to live in the second floor unit and rent out the ground floor unit? In cases like this, you want to be careful with tracking and allocating expenses between the two units. Some expenses will relate to the property as a whole like landscaping, snow clearing, property taxes, and utilities (if not separately metered). Other expenses are unit specific like cable and internet or plumbing repairs for only one of the units. Amounts related to the personal second floor unit would not be deductible as an expense on the rental unit and you will need to consider a reasonable allocation for expenses that relate to the whole property.

You'll also want to have an idea of your cash outflows going forward (i.e.: make a budget and don't forget about principal repayments on financing). This will help you figure out if the rent you will be charging will offset all those outflows and still leave cash in your pocket.

I want to move into my rental property or convert my home to a rental property. Now what?

Let's say the residential property you

purchased is rented out for a few years and then you decide you want to live in it. Or you currently live in a property and want to move out and rent it out. Either of these could result in a change in use, which means CRA could consider you to have disposed of the property even though you continue to own it and there could be tax to pay. 

You may be able to prepare and file an election which will defer the change in use but there are time limitations to do this. Deferring the change in use delays reporting as taxable income the increase in value on the property. This option is not available if you have claimed depreciation on the property.

How does the Principal Residence Exemption impact my rental property?

The principal residence exemption (PRE) allows a portion or all of the increase in value on a property to be tax free. You can designate one property per year of ownership and you or a family member must have occupied the property at any time in that calendar year. If you are planning on claiming a property as your principal residence which includes a unit you live in and a rental unit, the PRE may be affected.

As always, it's important that you discuss options with your professional advisor in order maximize tax savings, engage in proactive tax planning, and protect your wealth.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions