Real estate, over the long run, can be a great investment. For those who want to be landlords, the combination of long-term capital appreciation, the rather easy use of leverage and the potential for consistent cash-flows are attractive to many a would-be investor.
Then there’s taxation. The taxation of rental properties has a long, rich and complex history in Canada. It’s a smörgåsbord of legislative references, common-law case decisions, and Canada Revenue Agency policies.
In the end it’s up to rental property owners to self-report their own taxable income on an annual basis, but you can save yourself some aggravation by understanding the law better.
Here are some areas where rental property owners commonly misinterpret the rules and erroneously report their taxable income.
Motor vehicle expenses
The rules surrounding motor vehicle expenditures in relation to rental property operations can be confusing, particularly when an investor owns only one rental property. You can only deduct “reasonable” motor vehicle expenses if you meet all of the following conditions:
- you receive income from only one rental property that is in the general area where you live;
- you personally do part, or all, of the necessary repairs and maintenance on the property; and
- you have motor vehicle expenses to transport tools and materials to the rental property
The CRA specifically states that you cannot deduct motor vehicle expenses you incur to collect rents. The agency considers these to be personal expenditures.
Note that the rules differ if you own more than one property.
Failure to adhere to these guidelines can land you on the wrong side of an audit, so it is wise to keep within the allowable limits.
Mortgage payments
A frequently misunderstood deduction is mortgage interest. I have often run into taxpayers who argue (quite adamantly, I might add) that their rental property mortgage payments are entirelydeductible against their rental revenue.
Read more from Financial Post