Rental property tax turns on a handful of decisions.

The basics, quickly

Rental income and expenses go on the T776, Statement of Real Estate Rentals, filed with your personal return. One form covers all your properties, with the income and expenses broken out per property. If you own with someone else, the split follows ownership, not whoever happens to collect the rent.

Ordinary deductible costs are what you would expect: mortgage interest but not principal, property tax, insurance, utilities you pay, condo fees, advertising, management fees, and professional fees. Where it gets interesting is everything else.

Repairs or improvements, which is the question that never goes away

A current expense is deducted in full this year. A capital expenditure is added to the cost of the property and only comes back to you when you sell. Same cheque, radically different tax outcome, and the line between them is judgment rather than a rule.

What the analysis turns on:

• Restore or improve. Putting the property back to the condition it was in points to a current expense. Making it better than it was points to capital
• Enduring benefit. Something that will still be delivering value in ten years looks capital. Something consumed this year does not
• Part or whole. Replacing a component of something larger points to a repair, replacing an entire separate asset points to capital. This factor carries less weight than people assume, and it does not override the first one. A whole roof replaced in equivalent materials after storm damage can still be a current expense, because nothing was improved
• Scale relative to the property. A large spend on a modest property attracts attention on its own
• Timing. Work done to make a newly bought property rentable tends to be capital, because you bought it in that condition. The same work three years in reads very differently

This is worth a conversation before the work, not after. Once the invoice says "renovation" your options narrow.

Should you claim CCA?

You may claim capital cost allowance on a rental building. Whether you should is a genuine decision rather than a default, and it turns on your own rates rather than on a rule of thumb.

It cannot create or increase a rental loss. CCA on rental property is restricted, so it can bring rental income down to nil but no further. If you are already at a loss it does nothing.

It is a deferral rather than a saving. CCA claimed on the building is recovered when you sell, as recapture, taxed as ordinary income in the year of sale. What it does not do is change your capital gain. CCA reduces undepreciated capital cost, not adjusted cost base, so the gain above your original cost is the same whether you claimed CCA or not. The trade is simply a deduction now against matching income later.

Which makes it a question about rates and timing:

• If your marginal rate is similar now and in the year you sell, the deferral wins, because you have had the use of the money in between. Someone consistently in the top bracket is often in exactly this position
• If you are deducting at a low rate now and would recapture at a high one later, you have it the wrong way round
• Recapture arrives in a single year, alongside the capital gain from the same sale. Between them they can lift that year into a higher bracket on their own, even for someone who was mid bracket the whole time they were claiming

Worth deciding deliberately rather than because the software offered.

When a property changes use

Moving into a rental, or moving out of your home and renting it, is a deemed disposition for tax purposes. You are treated as having sold the property at fair market value and immediately reacquired it, even though no money moved and nothing changed on title.

That can trigger a taxable gain in a year you received no cash to pay it with. There are elections available that change the outcome, and they have deadlines and consequences of their own, including how they interact with the principal residence exemption.

The practical version: tell your accountant before you move, not at tax time. Elections have to be filed with the return for the year of the change, and options that were available in March are gone by the following January.

The same applies to converting part of a home, such as taking in a tenant or building a basement apartment. A partial change of use has its own treatment, and doing it carelessly can put part of your home's principal residence exemption at risk.

Selling

Three things decide the tax on a sale.

• Capital gain or business income. Buying to hold and rent gives a capital gain. Buying to renovate and sell can be business income, fully taxable, and the CRA looks at intention, holding period, frequency and how the purchase was financed. Property held only briefly is treated as business income under the residential property flipping rules, subject to life event exceptions such as death, separation, a new job or a growing family
• Recapture, if CCA was ever claimed. See above
• Adjusted cost base, which is where all those capital expenditures you did not deduct finally do their work. Which is why keeping the receipts matters even when they were not deductible at the time

A principal residence sale must be reported even when the gain is fully exempt. See personal tax.

The situations that need their own conversation

• Short term rentals. Different from long term letting on several fronts, including HST once you cross the threshold, and rules that can deny expense deductions where the operation does not comply with provincial or municipal registration and licensing requirements. If you run one, this is worth checking rather than assuming
• New builds and substantial renovations. HST applies, and there are rebates available for new residential rental property that are frequently missed and have filing deadlines
• Non-resident owners. Gross rent is subject to withholding at source, with an election available to file on a net basis instead. Getting this wrong is expensive, and the liability builds month by month
• Co-ownership or partnership. Owning jointly is not automatically a partnership, and the distinction changes the reporting. Worth being clear on which you have
• Holding in a corporation. Sometimes sensible, often not for a small portfolio. Set out below
• Renting to family below market rent. There is a reasonable expectation of profit question here, and losses may not be deductible
• Property situated on a reserve. Rent from property on a reserve raises the connecting factors question rather than the ordinary rental rules, and leasehold and certificate of possession interests do not behave like freehold title. See section 87 and First Nations tax

What I do with it

The T776 and the personal return, obviously. More usefully: getting the cost base tracked properly per property so that ten years of capital spending is documented when you eventually sell, deciding the CCA question deliberately, catching a change of use before it happens rather than after, and telling you which of the repairs you are planning this year are deductible this year.

If the portfolio is large enough to need it, proper per property reporting so you can see which ones are earning their keep. See customized accounting solutions.

If the property is held in a corporation

People incorporate rental property expecting the small business rate. Rental income in a company usually does not get it, and the reason is a definition worth knowing before the properties are moved rather than after.

Specified investment business

A corporation whose principal purpose is earning income from property, which includes rent, is normally carrying on a specified investment business. That takes it outside active business income, so:

• No small business deduction. The low rate does not apply to the rental income
• The high passive rate applies instead. Investment income in a CCPC is taxed at a combined rate in the low fifties in Ontario, which is close to the top personal rate by design
• Part of it comes back. A portion is refundable through the refundable dividend tax on hand account when taxable dividends are paid out to shareholders. So the high rate is a prepayment rather than a permanent cost, provided the money eventually comes out as dividends

The exception is scale. A rental business that employs more than five full-time employees throughout the year is not a specified investment business, and its rental income is active. That threshold is a real business with staff, not a holding company with a bookkeeper.

The knock-on effect for an operating company

This catches business owners who put rentals in a separate company and assume the two are unrelated. Where the companies are associated, passive investment income above $50,000 in the group grinds the federal small business limit, and it is eliminated entirely at $150,000. Rental profits in the holding company can therefore raise the tax rate on the operating company's ordinary business income.

Ontario does not mirror the grind, so the provincial limit can survive where the federal one has gone. Both need modelling rather than assuming. See tax planning.

Moving an existing property in

Transferring a property you already own into a corporation is a disposition at fair market value, which can trigger a capital gain and recapture on any CCA claimed, even though no money changed hands. A section 85 election can defer that, and it has to be filed on time and prepared properly.

Two other costs that are easy to overlook. Land transfer tax generally applies on the transfer, and in Toronto the municipal tax applies on top. And an existing mortgage usually has to be renegotiated, often at commercial rather than residential terms, because the borrower has changed.

When it does make sense

None of the above means never. A corporation earns its keep where there is real scale, where liability separation matters, where multiple owners need a clean structure for their respective interests, or where succession is in view and shares are easier to pass on than deeds.

What it rarely does is save tax on two rental properties held by one person. The right time to have this conversation is before the purchase, because unwinding it later costs more than setting it up correctly did.

Commercial: rent rolls and CAM

Commercial property runs on two documents that residential landlords never meet. Both are places where money goes missing without anyone noticing.

The rent roll

A rent roll is the schedule of every unit and what it produces: tenant, area, lease start and end, base rent, escalation dates, additional rent, deposits held, options to renew and any free-rent or fixturing periods.

It is the operating document for the property and it is what a lender or a buyer asks for first. Three things make one reliable:

• It agrees to the leases, not to what has been invoiced. Where those differ, the lease is right and the invoicing is wrong, which means you have been undercharging or overcharging
• It agrees to the general ledger. A rent roll showing annual revenue that does not tie to the income in your financial statements is the first thing a reviewer will notice
• Escalations and expiries are tracked forward. A rent step written into a lease five years ago only happens if somebody applies it. Missed escalations are the most common recurring loss in small commercial portfolios, and they compound because the following year's increase applies to the wrong base

Common area maintenance

Under a net lease the tenant pays base rent plus a share of operating costs. CAM is the mechanism, and the arithmetic is simple while the discipline is not.

Costs are pooled, then allocated to each tenant by their proportionate share, usually rentable area over total rentable area. Tenants pay monthly estimates through the year, and after the year end the actual costs are calculated and the difference is billed or credited. That reconciliation is the part that gets deferred and then skipped.

Where it goes wrong:

• The year-end reconciliation is not done, so estimates set three years ago are still being collected against costs that have risen. The landlord absorbs the gap without noticing it as a loss, because nothing on the statements says so
• Capital is put into the pool. A new roof is generally not a CAM expense, though the leases may permit recovery of certain capital items over their useful life. This is decided by the lease, not by preference, and getting it wrong is the item tenants most often dispute
• Vacancy is mishandled. If half the building is empty, the landlord bears the vacant share of the costs. Allocating the full pool across only the occupied tenants overcharges them, and gross-up provisions, where the lease has them, are specific and conditional
• The management fee is charged on a basis the lease does not support, or is charged on recoverable costs that already include it
• Exclusions are ignored. Most leases exclude specific items such as leasing commissions, tenant improvements for other tenants, or costs arising from the landlord's own negligence. These vary lease by lease, which is why one pool with one allocation percentage across a mixed portfolio is usually wrong

Tenants with any sophistication have audit rights and use them. A reconciliation that cannot be supported line by line is a bad position to defend, and the practical answer is to run it annually, on time, from records that separate recoverable from non-recoverable as costs are incurred rather than at year end.

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