The tax implications of owning property
With tax season upon us, now is the time to assess
the tax implications of owning real estate. Whether you own a home,
cottage or rental property, or are thinking of buying or selling,
it pays to be informed about how these moves might affect your tax
Homes and principal residences
Owning your home is a big plus on the tax front because, unlike
most other investments, capital gains on your principal residence
are not subject to income tax when the property is sold or transferred.
The Canada Revenue Agency sets out detailed rules
as to what qualifies as a principal residence, but in most cases
it is the house, condominium, mobile home, trailer or boat you regularly
live in during a given year.
Secondary residences or cottages
The catch is that since 1982, only one property per couple may be
designated as a principal residence. Any other property (typically
a cottage) must be designated a secondary residence and is subject
to capital gains tax on the profits when it is sold or transferred.
When most people think of rental property, they picture huge apartment
blocks administered by giant corporations. Nothing could be further
from the truth.
The vast majority of rental buildings are in the so-called
"plex" market -- duplexes, triplexes and so on. They are
typically owned by sole-proprietor landlords who occupy one of the
units and rent out the others.
Louis Robert, a financial planner with Centre Financier
Carrefour, in Montreal, helps dozens of landlords complete their
tax returns each year.
According to Robert, many landlords find that taking
care of the accounting, paperwork and tax returns are among the
hardest parts of owning rental property.
"You have to look at it like a small business,"
says Robert. "And as with a small business, you have to file
a statement of revenues and expenses for your rental property with
your return each year."
Plex owners can benefit from a slew of deductions
related to the apartments they rent. A duplex owner who rents an
apartment that accounts for half the square footage in a building,
for example, can deduct half of his eligible operating expenses.
These include repairs, municipal taxes and a portion
of the mortgage interest, as well as administrative and accounting
Building owners can also deduct capital cost allowances
related to depreciation on the portion of the building that is rented.
But Robert advises building owners to think twice before taking
advantage of this potential tax-saver.
"Although you can deduct depreciation expenses
each year and it will reduce your tax burden, you should be careful,"
"Because when you sell your property you will
be subject to a taxable gain from recaptured depreciation as well
as capital gains taxes. And not many building owners plan for that."
According to Robert, only about 20 percent of his
clients claim capital cost allowance deductions.
Here are some other advantages available to rental
- Unlike interest income and dividend income, you can include
rental income in your total earned income calculation on your
tax return to determine the maximum amount you may contribute
to an RRSP.
- Upon death, you can transfer the property to your surviving
spouse without triggering any tax consequences.
- If you have several apartments and your spouse helps you take
care of maintenance or administration, you can pay him or her
a reasonable salary, thus benefiting from income-splitting.
Home Buyers' Plan
If you are thinking about buying a home, the Home Buyers' Plan can
give you an attractive tax advantage.
The Home Buyers' Plan enables you to withdraw as much
as $20,000 from your RRSP to buy or build a home without paying
any tax on the withdrawal.
In the case of a couple, the amount rises to $40,000.
In both cases, the withdrawal must be paid back in installments
over a maximum period of 15 years.
You can read more about the Home Buyers' Plan here.
Diekmeyer is the Montreal Gazette's management columnist.