Tax on rental income

By IG Wealth Management • March 2024 • 9 min

TAX

According to a recent Stats Canada report, almost 1.4 million Canadian households reported having property rental income. That’s a significant portion of the population.

However, there are a lot of tax implications to consider when deciding to rent out a property, particularly one that used to be your primary residence. How much income tax will you pay on rental income? What tax deductions on rental property are available? And how does capital gains tax on rental property work? Knowing the answers to these questions is important so you don’t fall foul of the CRA, and also so that you can get a good idea of the margins of profitability involved in renting out properties.

How is rental income taxed in Canada?

On the whole, you’ll need to pay income tax on rental income. The tax rate on rental income in Canada is the same as your marginal tax rate (the tax rate you pay on your next dollar of income), since your net rental income would be in addition to your other sources of income (such as your salary, business income and investment income).

If you own the property with someone else, the income is split among each owner, depending on their share of ownership, and each person will pay tax according to their own marginal tax rate. If the property is owned with your spouse, the split in net rental income will be proportional to how much each spouse contributed to the purchase of the property.

If your rental property is held by a corporation that you own, tax on rental income gets a little more complex. We’ll discuss that further on in this article. 

Tax deductions on rental property

Before you pay income tax on rental income, you’ll be able to claim certain expenses to lower the amount of taxable rental income you have to report on your tax return (this amount is then called your net rental income). It’s important to know all of the expenses you can include to reduce the amount of tax paid as much as possible. These are some of the most common tax deductions on rental property:

Utilities: If you, rather than your tenants, are responsible for paying for gas, hydro, oil, water and/or cable, you can deduct these expenses.

Property taxes: These can be deducted for the time period your property was rented out or available for rent.

Insurance: You can deduct your insurance premiums for the rental property, but if you paid for several years’ worth of premiums all at once, you can only claim the amount that pays for the current year’s coverage.

Repairs/maintenance: The costs of any minor repairs or ongoing maintenance (both for the building and land), can be claimed as deductions against rental income. However, in the current year, you can’t deduct the costs of repairs that exend the useful life of the property or improve it beyond its original condition. These would be considered capital costs (see the capital cost section below).

Professional fees: These include legal services related to renting out the property (like preparing leases and collecting overdue rent), however it doesn’t include legal fees you paid when you bought the property (these are added to the capital cost of the property itself).

Advertising: Expenses for advertising the property to find tenants can be deducted, for either digital or traditional media.

Management and administration fees: If you hire a company to manage your property, collect rent and find tenants, their fees are a deductible expense.

Salaries, wages, benefits: If you employ people to help look after your rental property, such as a superintendent, etc., these expenses can all be deducted. You cannot, however, deduct the value of your own labour.

Understanding capital cost allowance

Your buildings, equipment and furniture are classified as depreciable property. The initial cost of these properties can’t be deducted all at once when calculating net rental income, but you can deduct a portion of the cost each year, over a period of several years. This is called capital cost allowance. The amount of capital cost allowance that can be deducted annually depends on each type of depreciable property.

Tax implications of turning a principal residence into a rental property

When you sell a home that was only ever used as your principal residence, you won’t have to pay tax on the capital gains if you sell it for more than you paid (as long as you didn’t claim the principal residence exemption against another personal use property while you owned it). This is not the case for rental properties, however, which are subject to tax on capital gains when you sell them and which are not eligible for the principal residence exemption.

Therefore, if you change the status of the entire property you own from your principal residence to a rental property (or vice versa), there is a set of complex tax rules that comes into play. From a tax perspective, the property is deemed to have been “sold” at its current market value, at the time of the change in use. This market value becomes its new tax cost base (also known as adjusted cost base). This is the value of the property that will be used to calculate potential capital gains or losses, going forward. You would have to report your property’s deemed disposition (change in status) on your tax return.

When you turn your principal residence into a rental property, you might be able to take advantage of a special tax election which would avoid the deemed dispositon at market value at the time of the change in use. The cost base of the property would remain unchanged (so it would not be reset to the market value at the time of the change in use).

The election would also allow you to designate the property as your principal residence for up to four more years, even if you don’t live there, but you can’t claim another property as your principal residence during that time. If you then move back into your home within four years, you won’t be required to pay any immediate capital gains tax for this second change in use.

You won’t be able to claim any capital cost allowance, however, and you would still need to declare net rental income.

If, on the other hand, you convert a rental property into your personal home, you can choose to make a similar tax election to defer tax on the unrealized capital gains until you sell the property (which defers the tax bill, it does not eliminate it). This option is only available if you haven’t previously claimed capital cost allowance on the property.

Tax implications of renting out part of your principal residence

You may be subject to the change of use rules, as outlined above, if you start renting out part of your home, however there are some circumstances in which you might not need to do this.

To avoid the deemed dispositon at market value of the converted portion of the property, there are some conditions you’ll need to meet. You can’t change your property structurally or claim capital cost allowance on the newly rented portion, nor can the rental part of the building be considered a separate unit. If these conditions are met, you won’t be subject to the partial change in use rules.

If these conditions are not met, you would have to declare a partial change of use for tax purposes and pay tax on capital gains on the part of your home that you start to rent out (usually calculated using the rented square footage as a percentage of the home’s overall size or on the number of rooms used for each purpose, as long as the split is reasonable).

Alternatively, you could file a tax election (as above) so that the deemed disposition that normally arises on the partial change in use does not apply, deferring the realization of the gain until a later sale.

Capital gains tax on rental property

When you sell a rental property, there will likely be either a capital gain or loss, plus any previously claimed capital cost allowance could be recaptured. While a capital gain is only 50% taxable, recapture of capital cost allowance is fully taxable.

The capital gain (or loss) will be the sum of the selling price (proceeds minus the costs to sell your property, such as realtor and legal fees), minus the capital cost of the property when you originally bought it.

Recapture will be the lesser of the cost of the depreciable property, including capital improvements (of the building, not the land) and the proceeds, minus the undepreciated capital cost. Here’s an example:

Lizette sells her rental property for $500,000 ($300,000 for the land and $200,000 for the building).
She bought it for $250,000 ($150,000 for the land and $100,000 for the building) 10 years ago. She made $50,000 of capital improvements over the years, for a total capital cost of $150,000 for the land and $150,000 for the building.
The undepreciated capital cost at the time of sale is $75,000.
It cost her $20,000 to sell it.
Capital gain = $500,000 - $20,000 - $300,000 = $180,000.
Taxable capital gain (50%) = $90,000.
Recapture of capital cost allowance = ($100,000 + $50,000) - $75,000 = $75,000
Tax owing when property sold (at Lizette’s tax rate of 40%) = ($90,000 + $75,000) X 40% = $66,000

As with all tax situations, you should consult with your accountant or tax specialist.

Does it make sense to own a rental property inside a corporation?

While incorporating an active business can often make sense from a tax perspective, it would rarely be advisable in this case, even if you own several properties. Rental property is considered passive, rather than active income, so you could actually end up paying more tax on rental income overall (by the time the after-tax net rental income is paid to you personally).

Is renting out a property the right choice for you?

If you’re considering renting out a property you own, or buying a property to rent, it makes sense to discuss your plans with your IG Advisor first. They’ll be able to help you work out the best way to finance the purchase, the tax consequences involved and how it would fit in with your overall financial plan. If you don’t have an IG Advisor, you can find one here.

Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.

Spring has (almost) sprung, and those overlooked places no one cared about in the depths of winter start to make their dirty little appearances when the sun shines through the windows. And, while we never look for an excuse to deep-clean our home, changing seasons is a perfect opportunity to get everything in order—whether we like it or not! So, to help you get a head start on spring cleaning, we wanted to share five spots in your home that may have taken a back seat over the winter but, with a little TLC, can make your home look and feel so much better!

Replace Your Furnace Filter

This one is the easiest to do, so we recommend carving out 30 mins THIS week and getting it done! Changing your furnace filter involves a trip to your local hardware store and then a simple switch when you get back home. You should change your filter four times a year (easy to remember, at the beginning of every season!), but every filter/home will have different needs based on use or conditions. Trust your instincts when it comes to this task—if you're a shedding pet owner or notice lots of dust accumulating in your home, you'll know to change your furnace filter more regularly.

Cupboards & Drawers

Kitchen cupboards and drawers are prone to grimy build-up, especially in the colder months when you're likely cooking indoors more often. Luckily, this task is relatively simple and provides instant gratification. Start by removing everything from one shelf or drawer, assessing if it needs to stay or go (expired/never going to use), and then wipe the empty interior down with some all-purpose cleaner and a microfiber cloth. Make sure the surface is completely dry, and then replace your belongings.

Declutter The Entryway & Closet

Your front entryway and closet can become a dumping ground for shoes, boots, jackets, accessories, junk mail... the list goes on. As the Winter season comes to an end, it's time to get this space in working order for the spring. This means removing everything that is no longer seasonally appropriate, cleaning up all the salt and/or slush stains, and returning your space to a clean slate for the weather ahead. If you don't need the deep freeze-rated parka or boots anymore, put them into storage and keep one coat and a pair of lighter-weight boots for the remainder of the season.

Swap Out Seasonal Clothing

While we're on the topic of putting away your deep-freeze items, now would also be a good time to go through your bedroom closet and decide what you plan to swap out when the warmer weather arrives. If you have a handful of items that never got worn during the colder months, consider moving on from them—selling or donating them will save you space, declutter your space, and potentially bring you in a few dollars! If you'd like a more detailed breakdown of how our founder and cleaning expert, Melissa Maker, handles this seasonal swap, check out our closet changeover guide.

Clean Exterior Windows

Last but certainly not least, cleaning your exterior windows can make a world of difference in how *sparkly* your home will look this spring. Depending on the size of your home and the number of windows you have, this can be a daunting task that you may need to break up over a few days (or weekends). There are products you can buy to help out, like an extendable squeegee, but ultimately, you want to make sure that you're tackling this job in the safest way possible (please, don't stack two ladders on top of each other to reach your third story windows!!). If it's in the budget, calling in a local window cleaning company can be the easiest way to get this job done fast (and without incident).

And there you have it! Five pretty easy—and a couple more challenging—tasks to kickstart your 2024 spring cleaning! If you'd like a more in-depth walkthrough, we have a comprehensive spring cleaning guide, complete with checklists for each area in the home.

  Zoning refers to the local government's regulation of land use within a specific area. It involves dividing a municipality or jurisdiction into different zones or districts, each with specific rules and regulations regarding how the land can be utilized. Zoning laws typically dictate the type of activities or developments allowed in a particular zone, such as residential, commercial, industrial, or mixed-use.

The primary purposes of zoning are:

1. Land Use Planning: Zoning helps communities plan and organize their development in a way that promotes orderly growth and protects the overall well-being of the community. It prevents incompatible land uses from being located too close to each other.

2. Property Values: Zoning can impact property values by influencing the character of a neighborhood. Residential areas, for example, are often zoned to preserve a certain quality of life, while commercial areas are designated for business activities.

3. Public Health and Safety: Zoning regulations can address concerns related to public health and safety by setting standards for things like building setbacks, fire codes, and environmental protection.

4. Aesthetic Considerations: Zoning may include regulations on the appearance and design of buildings, ensuring that developments contribute to the overall aesthetic of an area.

5. Infrastructure Planning: Zoning can help in planning for necessary infrastructure such as roads, utilities, and public services by aligning them with the expected development in specific zones

When purchasing real estate, understanding zoning regulations is crucial for several reasons:

1. Intended Use: Zoning determines what you can and cannot do with a property. Before purchasing, it's essential to know if the property is zoned for your intended use, whether it's residential, commercial, industrial, or mixed-use.

2. Future Development: Zoning regulations provide insights into potential future developments in the area. This information can affect property values and the overall desirability of the location.

3. Compliance and Restrictions: Zoning ordinances come with specific regulations and restrictions. Buyers need to be aware of these rules to ensure compliance with local laws and to avoid legal issues in the future.

4. Property Value Impact: Zoning can influence property values directly and indirectly. Understanding the zoning regulations in an area can help buyers make informed decisions about the long-term value and potential resale value of the property.

In summary, zoning is a critical aspect of real estate that influences the use, development, and value of properties. Prospective buyers should thoroughly research and understand zoning regulations before making a real estate purchase to ensure their plans align with local zoning laws and to make informed investment decisions.

Bank of Canada maintains policy rate, continues quantitative tightening

Global economic growth slowed in the fourth quarter. US GDP growth also slowed but remained surprisingly robust and broad-based, with solid contributions from consumption and exports. Euro area economic growth was flat at the end of the year after contracting in the third quarter. Inflation in the United States and the euro area continued to ease. Bond yields have increased since January while corporate credit spreads have narrowed. Equity markets have risen sharply. Global oil prices are slightly higher than what was assumed in the January Monetary Policy Report (MPR).

In Canada, the economy grew in the fourth quarter by more than expected, although the pace remained weak and below potential. Real GDP expanded by 1% after contracting 0.5% in the third quarter. Consumption was up a modest 1%, and final domestic demand contracted with a large decline in business investment. A strong increase in exports boosted growth. Employment continues to grow more slowly than the population, and there are now some signs that wage pressures may be easing. Overall, the data point to an economy in modest excess supply.

CPI inflation eased to 2.9% in January, as goods price inflation moderated further. Shelter price inflation remains elevated and is the biggest contributor to inflation. Underlying inflationary pressures persist: year-over-year and three-month measures of core inflation are in the 3% to 3.5% range, and the share of CPI components growing above 3% declined but is still above the historical average. The Bank continues to expect inflation to remain close to 3% during the first half of this year before gradually easing.

Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is April 10, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

Feb. 29, 2024 | CREB

Weird things that will increase the value of a home

Having an exterior deck, energy-efficient doors, and high-tech appliances are common features that improve a home’s value. 

Yet, some simple, even peculiar things can add value to a property. From Starbucks to celebrity power, here are a few:

Address number

Believe it or not, the house address number can impact a home's value. When a home has lucky numbers, they tend to sell for more.

Many cultures have lucky numbers that symbolize positive traits. For example, in Chinese culture, eight is the luckiest number as it’s associated with wealth, prosperity, success and status. On the other hand, in Judaism, the number 18 signifies good luck.

A research study by Property Reporter showed that in the United Kingdom, odd-numbered houses are typically worth £30,258 (~44,000 CAD) more than those that are even-numbered.

The Starbucks effect

According to Canadian REALTOR® Tatiana Londono, properties close to a Starbucks statistically appreciate faster than those in other neighbourhoods.

The multi-billion-dollar coffee company has teams studying the demographics of an area and working closely with developers who have access to data about sales and growth potential of the areas.

This ensures that the locations they are opening will be a valuable investment for them.

Celebrity power

Whether it’s a mansion or a converted warehouse, if a famous person once lived in a home, it will be valued more at resale.

When celebrities live in a particular property or neighbourhood, other celebrities tend to be attracted to that property or neighbourhood, given there might be a certain level of privacy and exclusivity, adding more value to the home.

Tree-lined streets

Having healthy, beautifully lined trees flourishing on the street is another sign that a home’s value can increase. Vegetation adds vibrancy to a community and contributes to positive mental well-being.

Did you know? The City of Calgary provides trees at no cost through its Branching Out program. Applications open in the Spring.

Steps to Take When Buying Your First Home

The following eight steps will help you get your financial and mental houses in order so you can search for a new home with confidence.

1. Assess Your Debt

Lenders want to know that you’ll be able to handle the debt you already have, in addition to your new mortgage payment. An important metric is your debt-to-income (DTI) ratio. It’s a good rule of thumb if your total monthly debt (including your mortgage payment) does not exceed 36% of your gross monthly income. The Consumer Financial Protection Bureau (CFPB) reports that a maximum DTI ratio of 43% is required to receive a qualified mortgage, which is seen as safer to lenders.

Getting your existing debt under control is imperative before you can begin your mortgage application and your house-hunting process. This includes:

• Credit cards: Pay down your credit card balances so you’re using no more than 30% of your available credit. Maxed-out credit cards can signal to lenders that you’re not using your available credit responsibly, which also lowers your credit score.
• Installment loans: You might consider paying off or significantly paying down any installment loans (e.g., auto loans) to ease your monthly obligations.
• Student loans: If you carry student loan debt, consider how these monthly payments will impact your ability to pay a mortgage. Paying off any credit card debt might give you more leeway in your budget to service both your student loans and a mortgage.

The more debt you pay off before applying for a mortgage, the less stress you’ll likely have when it comes to making your monthly payments.

2. Check Your Credit

The better your credit score, the lower the interest rate you’ll get on your mortgage. Checking your credit well in advance of beginning your home search will give you time to correct any errors and improve your score ahead of time.

You can boost your score a number of ways.

• Pay down credit card debt. When you lower your credit utilization rate, your credit score typically rises.
• Increase credit card limits. If you feel comfortable doing so, you can contact your credit card company and request a credit limit increase. The higher credit limit will lower your credit utilization rate. Before you ask for a credit increase, be sure to ask if the company will initiate a hard inquiry. You don’t want to accidentally lower your score with a hard inquiry when you’re trying to increase your score.
• Dispute errors. If you find a mistake on your credit report, you can typically get valid errors resolved in less than 30 days through the relevant credit bureau’s dispute process.

While credit scores as low as 500 can qualify you for certain mortgages, most lenders will expect a score of at least 620 to 680 to consider your application.

With a lower credit score, lenders may require a larger down payment and charge you a higher interest rate on your loan. Conversely, borrowers with high credit scores (800 or more) have lower down payment requirements and enjoy lower interest rates.

3. Review Your Budget

It’s important to remember that your budget will change when you buy a home and you’ll have new costs beyond just the mortgage payment.

Property taxes, homeowners insurance and maintenance are just a few of the additions you’ll want to plan for. You may find that your utility bills increase. You’ll also want to make sure you have enough money in savings to cover emergency repairs.

For many types of mortgages, lenders will want to see two months of reserves (for the mortgage, taxes and insurance) in the bank. For example, if your mortgage, taxes and insurance payments total $1,000, you’ll need to have $2,000 in readily accessible savings to show. If you’re buying a condominium or townhome, you might also have homeowners association (HOA) fees that will be included when the lender assesses your budget.

The reserves required will vary by lender and by loan size. Even if you ultimately secure a mortgage that doesn’t require reserves, it’s not a bad idea to have a couple months’ worth of expenses in the bank as a cushion.

4. Determine Your Down Payment

How much you’ll put down on your home depends on the type of mortgage you receive. However, the typical mortgage down payment ranges from 3.5% to 20%.

Essentially, the higher your down payment, the lower the risk you are to a lender. Lenders assume that buyers investing more cash up front are less likely to walk away from the money they have in their home. When you put down less than 20%, lenders often mitigate that risk by charging private mortgage insurance (PMI), which is an insurance policy that protects the lender if you default on your loan.

As you consider how much you want to put down, it may help to meet with a mortgage officer to explore possible loan options. An experienced professional can help you determine which loans will require PMI and how much down payment you might need to avoid paying this insurance.

When you save a bit more for a down payment, you may qualify for a mortgage that doesn’t have PMI requirements. Avoiding PMI can potentially save you hundreds of dollars a month.

5. Get Preapproved

When you’ve cleaned up your credit and paid down your debt, you’ll want to get preapproved for a mortgage. Preapproval is a valuable process for several reasons.

First, you’ll find out exactly how much you’ll be able to borrow and therefore, how much home you can afford. Knowing your purchase power will help guide your home search and keep you from unnecessary disappointments that come with shopping outside your limits.

Next, preapproval positions you as a serious buyer. Many real estate professionals won’t take on buyer clients if they haven’t already been preapproved. A seller’s agent will know a lender has vetted you and that there’s less of a chance your funding will get derailed in the closing process.

Preapproval lets your agent take you shopping with confidence because they know they can make offers on your behalf with confidence.

6. Figure Out the Type of Home You Want

When you know your buying power, you can review all the home options available in your area by first understanding the types of homes that are out there.

• Single-family homes: These are what most people mean when they refer to a house. These homes aren’t attached to other homes.
• Duplexes: These houses are typically two homes with separate entrances in one building and share a single common wall (if side-by-side) or floor/ceiling (if a two-story building).
• Condominiums: These are privately-owned units in a larger building or development of multiple units where owners own the interior of the unit, not the exterior building. Owners typically share common areas and amenities (e.g., pools, gardens, hallways, parking). There are usually HOA fees paid monthly to cover the maintenance of shared areas and amenities.
• Townhomes: These are multistory dwellings constructed side-by-side where the owners own both the interior and exterior of the units. There are usually one or two shared walls with other units and association fees to cover any shared amenities.

As you review the types of homes available in your area, consider the space you need, the cost of each type of home and any additional fees that the different home types might incur.

For example, you may find that you would prefer a single-family home, but the cost in your area stretches your budget to the maximum. You might consider townhomes or condos with similar square footage but at a lower cost, if the HOA fees still make it worth it.

7. Research Where You Want to Live

Once you’re preapproved and have an idea of the type of home you’d prefer, it’s time to research your favorite neighborhoods.

Consider these neighborhood features when you’re shopping for a home:

• Schools: Top-rated schools typically have an impact on home prices.
• Walkability: Amenities within walking distance might be key to help you save a car trip, like playgrounds, grocery stores and public transit.
• Parking: If you’re considering a building without parking, pay attention to the availability of street parking, especially at night and on weekends when more residents might be parked. You can also explore rental parking options.
• Property taxes: Different neighborhoods can have vastly different property taxes. Your real estate professional will have this important information.

You might consider visiting your target neighborhoods several times and at various times of day to get a picture of what life might look like if you bought a home in the area.

8. Compare Mortgage Rates

As you get ready to commence your home search, it pays to shop around for mortgage loan rates.

According to a study by Freddie Mac, buyers who get mortgage quotes from one additional lender save an average of $1,000 over the life of their loan. Those who get up to five additional rate quotes save an average of $3,000.

As you compare lenders, be sure to look beyond the interest rate. You’ll want to compare closing costs, points and lenders fees, too.

Now You’re Ready to Search

When you’ve done the groundwork above, you’ll be in a prime position to shop for your new home with confidence. Not only will you have your finances in order, but also you’ll have a solid understanding of your local market and the tools you need (like preapproval) to make a competitive offer.