People invest in real properties in hope that they would rake in cash in the long run. Unfortunately, however, rents collected by landlords hardly keep up with the high expenses their rental properties ensue. That said, a lot of such expenses on rental properties as home or mortgage insurance are fully deductible, and as their owners, you should claim them in T776 form. Let’s go through some of the major expenses you can claim to reduce your tax duty.
For starters, consider the expenses made on property maintenance. These are called current expenses and can be deducted in full. If the property is rundown, for instance, and you will have to pay for construction to restore its formal condition, you can deduct all the payments. However, if the construction is to enhance the property to either increase rents or value of the property for the purpose of sale, expenses on such construction are considered capital expenses. The difference between the two kinds of expenses can be seen in their effects and purposes. While current expenses are likely intended for repair, capital expenses are more likely to result in long-lasting improvements that would increase the value of the property in general. Here is an example to lend you a more solid grasp on the definition:
Emily plans to sell a real property she bought in 2015. She spends two thousand on roof repair and lousing, and five thousand on hardwood floors. Lousing and roof repair are both considered maintenance; hence, the fees on such maintenance are current expenses and fully deductible. As for hardwood floors, they are more permanent and have a long-lasting effect on promoting the value of the property. The expenses on the flooring are, therefore, capital expenses.
Fees on construction and renovation aside, home insurance also constitutes a large part of expenses on real property. While insurance premiums for your rental properties are fully deductible, you can only claim for the amount incurred in the same fiscal year. For example, you paid two thousands on your home insurance that came into effect on June 1, 2020, and would cover you for a whole year. In March 2021, when you file your tax return, you should only include the amount paid up to March at the time of filing, other than June 1. Please note that this only applies to rental properties. That said, if you rent out part of your residential property, you need to calculate the percentage of the rental part to your residence and claim that percentage of the total home insurance premiums.
What else can you deduct in full? Oh yes, advertisement! Be it on social media or in a goody newspaper, so long as you have invested in promoting your property for sales, the expenses are fully deductible. Also, if you pay for the utilities on behalf of your tenants, you can claim all the amounts in full.
However, there are some fees that fall out of the CRA’s grace. Interests on your mortgage and other bank charges have little to no use in the aspect of tax deduction, with a caveat on a mortgage application. That is, any fees associated with applying for the mortgage, such as lawyers’ fees, closing fees, or appraisal. Do remember to avail yourself of all such expenses to offset your rental income. Another exception is soft cost, which is defined as funds borrowed for the purpose of construction and renovation as per the CRA. If you borrow from a bank for current or capital expenses as mentioned above, interests accrued to the sum are deductible.
The can and cants can be fussy, and if you need a ruling or help with filing, do give us a holler. Our charter accountants will be happy to answer any questions.