The Money Mustache Community
Around the World => Canada Discussion => Topic started by: AJDZee on July 31, 2019, 08:34:29 AM
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Hello,
I've just finished gutting/renovating an old home that's way too big for just myself, and as such I'm renting out 2 floors.
I'm a first-time landlord and just starting to learn how the taxes will work.
My question is, with the renovations I did to the house (50% of which is for the rental, let's assume), is it advantagous to claim these capital expenses on my taxes?
And more importantly, will doing so lead to paying capital cains taxes in the future should I sell my house?
I don't plan on selling any time soon, and I also don't know how long I will rent out for - perhaps I'll have a family in the future and need the space back..? Just trying to gain an understanding of how it works and don't want to paint myself into a corner.
*I've already tried speaking to a 'tax professional' however I don't think this was his expertise, I left his office not any more clear on this matter*
Thanks in advance
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Disclaimer: I am not a tax professional.
Capital Gains is due on the sale of any property used to earn money, even when it is part of your primary residence.
https://househuntvictoria.ca/2016/10/07/do-you-have-to-pay-capital-gains-tax-on-your-suite/
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/completing-schedule-3/real-estate-depreciable-property-other-properties/example-disposing-a-principal-residence-partly-used-earning-income.html
https://househuntvictoria.ca/2017/09/28/capital-suite/
Get further advice on how to book your capital costs, but it won't change the above.
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I never carried a UCC balance for rental property that I thought would increase in value... so I did not depreciate capital improvements (capital expenses like a new roof) over time.
The reason is that you are hit with paying income tax on the recaptured UCC when you sell for more than the balance on the UCC line... plus any capital gains that you incurred.
For some people, claiming UCC over say, 10 years, while they have a very high income (so they have losses), then selling property in a low income year and paying the tax later (e.g., when retired) makes sense. There are other scenarios that can make sense to claim UCC, too.... but generally if you expect value of the buiding to increase, don't claim UCC.
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When I rented my basement suite out I was able to deduct the interest for the mortgage in proportion to that part of the house (40%). Plus I deducted 40% of the utilities, insurance etc. as rental expenses. For your situation, estimate the total income (rent), subtract expenses (interest, utilities, etc.), what kind of paper profit do you have? Use some numbers to get a handle on the scale of the question.
When it was all done I was left with no profit, on paper, since it was all going against the deductions. I never claimed capital deductions because I had enough other deductions. By cutting my expenses by 40%, I came out ahead on a personal basis, that's where I saw the benefits. Plus, it paid for all the interest on the house I didn't need at the time; its now converted to space for my kids to play and my wife and I to enjoy (I was single when I bought the house, my situation improved).
I also had roommates, which is classified differently than a tenant. A roommate shares a kitchen, a tenant does not. Roommate rent is not considered as income. To be clear, are you going to have separate entrances and separate kitchens from your renters? My city would never have zoned me for 2 suites in my neighbourhood, but I was zoned for a single suite (at 40% or less of the total property size).
This advice only applies to an owner occupied house. It is different than a true rental property, the situation is more nuanced and much more beneficial to the owner.
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Roommate rent is not considered as income.
This is quite untrue for taxation purposes. If you own the home and you have a roommate(s): you owe taxes on that income.
From CRA: "All money you receive as a result of an accommodation sharing arrangement is taxable for income tax purposes and you should report it as rental income when you file your income tax returns. Individual situations vary and the tax implications could be different depending on the specific facts of the situation."
One of the "variations" is that your "roommate" is a spouse that does not own the home but that pays you money; this can fall under "cost sharing" instead of rental income. But the tax law is pretty clear that rental income is taxable.
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Moneysense has a good Q&A on this...
Question - can I still claim Primary Residence Exemption for my entire home, even though I rent out a basement suite?
"In your case, I would assume that the basement suite is a mortgage-helper—a way to supplement the costs of owning a home in Canada. As long as you pay the required income tax on the rental income, the CRA will probably not consider this a breach of tax rules and regulations and you should still qualify for the PRE."
https://www.moneysense.ca/spend/real-estate/income-properties/principal-residence-exemption-rental/ (https://www.moneysense.ca/spend/real-estate/income-properties/principal-residence-exemption-rental/)
Although you pay income tax on the rental, you can also claim expenses..
"the rental income must be claimed (form T776) and filed with your tax return, but there are several deductions available to lower your tax bill. They can include: A portion of mortgage interest, property taxes, insurance, repairs and maintenance, landscaping, utilities, advertising costs, office expenses, professional fees, management fees, salaries or wages, travel costs, and car expenses." https://www.bnnbloomberg.ca/personal-investor-renting-out-a-room-to-students-the-cra-wants-to-know-1.842960 (https://www.bnnbloomberg.ca/personal-investor-renting-out-a-room-to-students-the-cra-wants-to-know-1.842960)
GST -- Rentals under $20/day are exempt from GST, as are residential homes rented for a month or more at a time to the same occupant.
Low income -- The first $12,069 of income in a year is exempt from tax. If your spouse owns the property and is the person incharge of renting it out, but has no other income, then this can be an advantage.
In general, your goal is to have "valid" expenses to offset your rental income when you rent out a portion of your home, to reduce tax.
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If the OP is renting out 50% of their house, then capital gains will apply. For them not to, the portion of the total property they rent out would have to be 'relatively small' as well as not claiming any CCA. (Links below) Revenue Canada is rather vague there, but 50% isn't relatively small by anyone's measure. And since you have to describe what percent of the house is rental on your T776, they'll know.
Goldilocks already explained why claiming CCA is dumb taxwise, and there is also another reason; once you've claimed CCA, you can't reassign an investment property (or, I assume, the portion of your home being used for income) back to primary residence status.
If someone had a 100% investment property that was rented for 15 years, and then they retired to it, they could reassign the property to primary residence... if they had never claimed CCA. They'll owe capital gains on it for the years it was an investment property, but wouldn't on the years that they lived in it.
It's worth reading very closely what is capital expenses and what is current expenses so that you're claiming as much as possible, because some of what the OP did to ready it for renting will be claimable. (But not your time... you can't pay yourself wages.)
Changing part of your principal residence to a rental or business property
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/principal-residence-other-real-estate/changes-use/changing-part-your-principal-residence-a-rental-business-property.html
You are usually considered to have changed the use of part of your principal residence when you start to use that part for rental or business purposes.
However, you are not considered to have changed its use if all of the following conditions apply:
your rental or business use of the property is relatively small in relation to its use as your principal residence
you do not make any structural changes to the property to make it more suitable for rental or business purposes
you do not deduct any CCA on the part you are using for rental or business purposes
Subsequently, when you actually sell the property you have to take all of the following actions:
Split the selling price between the part you used for your principal residence and the part you used for rental or business purposes. The CRA will accept a split based on square metres or the number of rooms as long as the split is reasonable
Report any capital gain on the part you used for rental or business purposes.
Changing all your principal residence to a rental or business property
https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/principal-residence-other-real-estate/changes-use/changing-your-principal-residence-a-rental-business-property.html
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^^ I read an article (sorry, I don't have the link) where the e storey house in Ontario was not allowed to include the suite portion under the principal residence rule, WHY? The basement suite -- had its own street address. Not "a" or "B" but its own number. That, and the obvious fact that that specific owner was treating it like a business had the CRA audit go against the homeowner and the suite portion was not considered to be principal residence cap gains exempt.
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Ooh, that's a good one, Goldie. So many houses where I live get split in 2 - duplex basically - but get different numbers. I guess you can ask for that at City Hall, and people probably like the idea of having their own number. But if you own both sides and plan to rent, probably you should switch it back to one number, A & B side.
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Goldilocks already explained why claiming CCA is dumb taxwise, and there is also another reason; once you've claimed CCA, you can't reassign an investment property (or, I assume, the portion of your home being used for income) back to primary residence status.
If someone had a 100% investment property that was rented for 15 years, and then they retired to it, they could reassign the property to primary residence... if they had never claimed CCA. They'll owe capital gains on it for the years it was an investment property, but wouldn't on the years that they lived in it.
It's worth reading very closely what is capital expenses and what is current expenses so that you're claiming as much as possible, because some of what the OP did to ready it for renting will be claimable. (But not your time... you can't pay yourself wages.)
Thanks Missy B and Goldie for your time and input.
I will obviously deduct the ongoing expenses against rental income, but I agree about the capital - I've made peace with the fact claiming that balance isn't advantageous in the long run. So I won't capitalize that money spent.