There are a number of tax implications to consider when renting out your property. Whether you own it in your personal name, as a corporation, or in a trust, your rental income will be treated differently.
Depending on your situation, you may be able to take advantage of tax deductions and incentives. Learn more about your options with our guide to the Rental Income Tax Rate Bc.
Property Tax Rates
If you’re a property owner in Canada, you need to be familiar with the different tax rates that apply to your income. This can help you to keep your finances in check and make sure that your tax obligations are handled correctly.
The property tax rate you’ll pay depends on the type of property you own and how you’re able to deduct certain expenses from your rental income. For example, if you own an apartment building, you can deduct the costs of maintaining and managing that property. You can also claim the insurance premiums you pay for renters’ insurance.
You should also consider the property transfer tax you’ll owe if you purchase or sell a residential property in B.C. This is an additional tax that is based on the fair market value of the land and improvements at the time it was registered with the Land Title Office.
This tax can be avoided if you’re buying or selling a pre-sold strata unit or if you meet certain criteria for the Home Owner Grant (HOG). If you qualify for either of these, you’ll be eligible to receive a significant rebate from the government on your property taxes, which can be worth up to 50% of your annual tax bill.
For more information, see Guide RC4231, GST/HST New Residential Rental Property Rebate.
There are many tax implications to consider if you own a property in British Columbia that you plan to rent out as part of your long-term investment strategy. These include the Underused Housing Tax (UHT), the SVT and the EHT.
Purchasing a residential property with the intention of renting it out can be a good decision for many reasons. It can provide you with the opportunity to create wealth and build a legacy for your family, while also easing the burden of housing costs in the long term.
However, there are also some complexities to consider. For example, if you’re leasing your home out to tenants for more than a year, the CRA may consider this a change of use and limit your access to the principal residence exemption. In addition, the sale of your home may result in a capital gain that you’ll have to pay tax on if it exceeds the adjusted cost base of your property.
Small Business Deduction
When you’re running a small business, you can deduct expenses related to your rental property. These include insurance, interest, legal & accounting costs, management & strata fees, maintenance and repairs, property taxes, utilities, and any relevant travel costs.
The main thing to keep in mind when it comes to claiming these deductions is that they have to relate to your property and be incurred for the purpose of making money with your rental property. That means that expenses you incur in a year to purchase or renovate your property will not be deductible for that tax year, even if they are reasonable, necessary and documented by receipts.
You can also claim capital expenses that add long-term value to your property, such as permanent additions or structural improvements. These expenses don’t get immediately deductible, but are written off over time through a capital cost allowance (CCA).
Other tax deductions that you may be eligible to claim if you operate a small business include bookkeeping services, audits of your records and preparing your income and information returns. You can also deduct amounts you pay to an agent for collecting rents or finding new tenants.
However, some expenses may be restricted or denied entirely. This is because they may be considered a capital cost, rather than a current expense.
For example, if you’re buying a fixer-upper to lease to tenants, your ability to deduct mortgage interest and professional fees during the renovation process will be severely limited or completely barred. Similarly, the land transfer taxes you paid when you acquired the building will be considered a capital cost instead of a current expense.
The best way to make sure you’re claiming your maximum allowed deductions is by working with a CPA that’s familiar with real estate tax law and the various ways in which it can affect your business. They’ll help you navigate the ins and outs of tax laws so that you can maximize your profits and save more money every single year.
The only other thing you can do to avoid owing taxes on your rental income is to file your tax returns early and on time. In order to do that, you need to have a good idea of the exact amount of money you earned from your property during the year. Then, you can calculate how much of that income is subject to tax and how much isn’t.
Active Business Income (ABI)
Active business income (ABI) is an important type of income to keep in mind when calculating your Rental Income Tax Rate Bc. This type of income includes a corporation’s interest and dividends from its capital, plus any other investment income such as gains on the sale of assets.
Subsection 125(7) of the Income Tax Act defines active business carried on by a corporation as “any business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade.” The definition also excludes passive income, which is any type of income generated from an activity that doesn’t involve carrying on a business. This includes interest earned on a bank account, rent, and any other form of investment income that doesn’t involve a direct business activity.
Canadian-controlled private corporations (CCPCs) that earn active business income in Canada may be eligible to claim the small business deduction, which lowers their corporate income tax rate by 12.5% for the first $500,000 of active business income. For the rest of their ABI, CCPCs are taxed at the general rate of 26.5% in Ontario.
This lower rate on ABI provides significant tax-deferral advantages for CCPCs. As a result, they can accumulate more funds within their corporations, which could be used to invest and earn additional income. The longer the funds remain in the corporation, the higher the value of this deferral advantage.
CCPCs that earn ABI in Canada are subject to federal and provincial taxes, which can significantly affect their total annual tax bill. In addition, a company’s taxable income is allocable to provinces and territories using a two-factor formula that reflects the amount of gross revenue that has been generated by the business.
The Small Business Deduction allows a Canadian-controlled private corporation (CCPC) to claim the small business deduction on the first $500,000 of its active business income, as well as on all other ABI up to its $500,000 business limit. However, the CCPC’s business limit must be shared by any associated CCPCs that are also carrying on an active business in Canada during the taxation year.
Non-Resident Tax Withholding
If you own or manage a rental property in Canada, you are required to abide by the tax obligations of Canada’s Income Tax Act. This includes filing the NR4 form, remitting non-resident tax withholding, and reporting rental income on your Canadian income taxes.
The Canada Revenue Agency (CRA) sets a 25% withholding rate on gross rental income paid to non-residents. This is generally the only tax obligation non-residents with rental properties in Canada must comply with. However, a non-resident can elect to pay tax on their net rent instead of the gross amount. This can be a beneficial tax strategy, especially if there are other expenses associated with earning the income from the property.
Expenses related to renting out a property include advertising, legal and accounting costs, management fees, maintenance and repair, utilities, and travel costs related to maintaining the property. Some of these expenses may be deducted from your rental income for income tax purposes, and other may be deductible as capital expenses.
In addition, interest on a mortgage or bank loan, property taxes, and depreciation are also deductible from your rental income in Canada. This can lower your tax bill by a substantial amount, even though the rate is high.
If you are a non-resident owner of a rental property in Canada, you must have the non-resident tax withheld from your gross rent payments by your tenants or the person managing your property. This is remitted to the CRA on or before the 15th day of the month after the month you received your income.
You can file a Section 216 tax return to have the non-resident tax withheld refunded. This is a good option if you have remitted the withholding tax already and are now unable to pay the total amount you owe. The Section 216 tax return is due by June 30th of the following year.
Non-resident owners who wish to make an election under Section 216 should contact their non-resident agent for advice and assistance. This agent will complete the Form NR6 and mail it to the CRA for approval before January of each year or when the first rent payment is due.
Among many other things, David A. Grantham is a contributing author to UmassExtension West Vancouver Blo. He is a renowned expert on real estate in BC.
Born in North Vancouver, Louisiana, Dr. Grantham grew up in Lower Lonsdale. He then went on to complete his business degree at the University British Columbia. As of this writing, Grantham has completed over 100 projects, including the development of a high rise building in Vancouver.
He is a husband, father, son, brother, and friend. He was a dedicated outdoorsman and enjoyed sports such as hunting, fishing, scuba diving, and snow skiing. His wife, Alison Grantham, and their two daughters survived him. He is survived by his wife Alison Martin Grantham and two daughters.