It is a party time. And it is almost tax time as well. There are various sets of ground rules on income from rental property(T776). Here are 5 tips in filing your rental property in personal tax returns.
CCA
CCA, capital costs allowance is a totally tax term. Simply say, it is a tax write-off. As the property(building only) and other furniture/equipment used in the rental business, you are allowed to deduct their costs over the period at the prescribed rates. Generally, land is not a depreciable property. Therefore, you cannot claim CCA on its cost.
A couple rules to remember, you cannot deduct the total costs of the property or items that should be capitalized by nature. Secondly, you cannot create a rental loss by utilizing CCA. Another point that may attract your attention is whether to take CCA the building itself. There is no right or wrong on whether to take CCA on the building. As CCA is taken on the building and net rental income is reduced accordingly, you can enjoy the lower tax burden in current year but you are exposed to tax on recapture for those years CCA taken on the building when the property is sold. Either benefiting now or taking a hit in the future. Talk to your accountant and find out.
Capital costs
Capital costs are those amounts that you list on CCA schedule to claim the tax write-off. What is the composition of capital costs? Generally, it consists of:
■ the purchase price, not including the cost of land;
■ the part of your legal, accounting, engineering, installation, and other fees that relates to the purchase or construction of the rental property;
■ the cost of any additions or improvements you made to the rental property after you acquired it, provided you have not claimed these costs as current expenses;
■ Related soft costs (such as interest, legal and accounting fees, and property taxes)
In some cases, people add home improvements made to the property and claim CCA. When the time comes to sell the property, there is a balance left in the capital costs (UCC). Can the balance added
Back to the cost of the property to reduce the gain that is realized on the disposition? The CRA may challenge on the intent as mentioned above “provided you have not claimed these costs as current expenses”. Think about it first before taking the tax deduction.
Change in use
A lot of people strategically invest in Canadian real estate market. Buying from pre-construction and then move in to the new property, turn the current principal residence to a rental property. Be careful!This situation as described now is called “change in use”,which may have significant tax implication for the owner. Why? The change in property use will trigger a deemed disposition. Hopefully, the principal residence exemption will shelter the gain from the deemed disposition. If you still like to have the property
Designated as a principal residence, what you can do? Here is the solution. You can make an election not to be considered as having started to use your principal residence as a rental property. This means no capital gain is required to be reported when you change its use. And two more important criteria that you have to keep in mind:
■ report the net rental income you earn; and
■ no capital cost allowance (CCA) on the property has been claimed
If those criteria are not met, the election will be denied by the CRA.And the tax consequence is very serious.
Expenses not deductible
Generally, expenses related to rental operation can be deducted. However, some expenses incurred for the business are not deductible.Land transfer taxes cannot be deducted as it is part of the cost of the property. Mortgage principal payment is disallowed but interest payment is allowed. Any penalties shown on the tax assessment are not deductible. Your own labor cost is not deductible, either. If you insist, you will need to report your income on another line of T1 meanwhile taking deduction of your own labor costs. Obviously,it is a wash.
Books and records
There are reasons that the CRA put significant resources in addressing issues noted in real estate market. Documentations from taxpayers perspective become quite critical. The CRA may disallow all or part of the expenses if the receipts or other documents are not available. Generally, books and records are required to be kept for six years from the end of the tax year to which they relate to. Keep all the documents available and organized. It will help your accountant identify potential issues immediately and shield you from the “attack” in an efficient way.
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