Types of Rental Expenses
Landlords can claim a number of different current expenses in relation to rental of their properties. Below is non-exhaustive list of current expenses and the restrictions on claiming these expenses. Landlords should consult with one of our expert Canadian tax lawyers to ensure they are claiming all potential expenses properly and deducting these expenses in the correct years.
Advertising: This expense includes finder's fees and other advertising done to find tenants for your property.
Insurance: The insurance premiums on your property can be claimed in each year they are charged.
Interest and bank charges: If you incur interest and bank charges to buy or improve your rental property, you can claim these expenses. You should make sure you have records to support those expenses.
Office expenses: Office expenses include small items like pens and stationary you may acquire in relation to the rental of your property as well as cell phone and Internet expenses. This expense does not include capital property like desks or computers, which would be a capital expense.
Professional fees (includes legal and accounting fees): Professional fees associated with your rental property may, for example, include legal fees to have rental agreements prepared or a tenant evicted.
Management and administration fees: Some landlords may outsource management of their properties or finding tenants to third party companies. They can claim expenses related to these activities.
Repairs and maintenance: Upkeep of rental properties is vital to maintaining the quality of the property and ensuring no violations of tenant-landlord regulations. Repair and maintenance expenses can be claimed except where they are capital expenses or related to the labour of the taxpayer.
Salaries, wages, and benefits (including employer's contributions): If a landlord hires individuals to maintain and administrate the property, he or she can claim expenses with regards to these employees' salaries and related expenses (e.g. worker's compensation and insurance). The landlord cannot claim an expense with regards to his or her own labour. The landlord must also be aware that hiring individuals, unless they are independent contractors, creates payroll tax obligations.
Property taxes: The landlord can deduct property taxes paid for the period the property was rented.
Travel and Motor Vehicle expenses: You can deduct expenses related to travel and motor vehicle expenses. If you own only one property, you can claim motor vehicle or travel expenses related to repairs and maintenance you personally conduct on the property. You cannot claim expenses related to collecting rents. If you own two or more properties, you can additionally claim motor vehicle or travel expenses related to collecting rents, supervising repairs and managing the properties. The two or more properties must be located in different areas away from your principal residence. Travel expenses do not include room and board.
Utilities: Utilities will be discussed in greater detail later in this article.
Other rental expenses: There are expenses such as landscaping expenses and condo fees landlords can claim which are not covered by the above categories.
Rental related capital expenses
In the above section, several expenses were excluded as "capital expenses". Capital expenses can still be deducted by landlords, but they are deducted over several years based on their class of depreciable property and the Capital Cost Allowance (CCA) rules which are outside the scope of this article. Note that you cannot create or increase a loss from rental income through the use of a CCA claim. If you have questions with regards to capital expenses, our expert Canadian tax lawyers can assist.
Who is paying and claiming the rental expenses?
There are many different types of rental arrangements and ownership arrangements for property. A couple may own a property jointly, and rent the entire property to a tenant. Another taxpayer may own their property alone and rent to a tenant who pays their own utilities. Yet another taxpayer may rent out a single room in their home to a friend charging a rentwhich includes utilities. The exact nature of the rental arrangement can change the expenses claimed by the landlord.
Jointly owned property: Where a property is co-owned by multiple landlords, the rental expenses are prorated based on the percentage ownership of each landlord. If Mary and Joe own their property rental property 50/50, they can each claim fifty percent of the expenses. For reporting purposes, Mary and Joe report both the full amount of the expense and their prorated portion.
Tenant Pays Utilities: Utility payment arrangements for rental properties generally come in three types. The landlord contracts with the utility provider for utilities. In these arrangements, the tenants either pays utilities as part of their rent (i.e. a flat rate regardless of usage of the individual utilities) or as an additional expense based on usage. Alternately, the tenant directly contracts with the utility provider for utilities and the landlord is not involved. Landlords may use different arrangements for different expenses.
If the tenant pays utilities on a flat rate basis as part of their rent, the landlord simply reports the utilities as a rental expense. If the tenant pays the utility as an additional expense, the landlord should increase the rental income reported by the amount of the utility payment and report the utility payment as a rental expense. In the additional expense scenario, there will be a net zero change to the landlord's taxable income. If the tenant is paying the utility provider directly, the landlord cannot report an expense for the utility paid by the tenant.
Partial Property Rental: Where a landlord rents out only a portion of their property, the landlord must apportion expenses accordingly.
Non-Residents Renting out Property in Canada
Taxpayers who are not resident of Canada for tax purposes are still required to pay Canadian tax on any rental income earned from properties located in Canada. The general withholding tax rate on this type of income is 25%, but it may be varied by a tax treaty between Canada and the country the landlord is a tax resident of. The withholding tax based on the gross amount of rental income. This means these landlords cannot claim current rental expenses to offset their rental income.
There is an exception to this rule. A non-resident landlord can file the Section 216 election. By filing this election, the landlord is permitted to claim current rental expenses and pays tax based on his or her net rental income. If the tax withheld is higher than the tax payable on the net rental income, the Canada Revenue Agency will refund the difference to the landlord. Generally, the election will be beneficial to the landlord except where the administrative costs of filing the election each year outweigh the tax benefit.
Pro Tax Tip: Record Keeping is Vital
The Canada Revenue Agency is quick to deny expenses where the taxpayer cannot provide sufficient documentation to prove the amount of the expense claimed. Landlords should be careful to keep records of their expense payments, such as bills, invoices and travel logs. Landlords should also keep records related to their property ownership and rental agreements. If a landlord discovers an error with their claimed expenses, our experienced Canadian lawyers can assist with correcting the error. We can advise on different strategies such as filing a T1 adjustment request, a voluntary disclosure application or a late section 216 election. The voluntary disclosure application allows taxpayers to disclose reporting errors to the Canada Revenue Agency without interest and/or penalties.
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.