Non-Resident Rental Property Owners: Tax Deduction Tips
Taxes, taxes, taxes! Allow us to help you lower your annual tax payments and keep more funds in your pocket for those well-deserved home improvements and annual housing expenses. Owning a property already comes with a list of yearly expenses such as insurance and property taxes, yet owning a rental property often comes with additional costs. For example, you may hire a property manager to look after your home, engage a Realtor to advertise on your property or hire contractors to renovate your home to ready it for rental purposes.
All of these service providers come at a cost, so is there any way to have extra benefit from all of these expenses? One way to lower your total annual costs and keep a little more money in your pockets is to properly report your rental income and include all deductible expenses. For most people, the thought of filing tax returns isn’t a consideration until the filing deadline is near approaching and then we’re scrambling to get our tax documents together. An easy way to make sure you include all of your property related expenses on your tax filing is to simply keep all of your receipts! Whether it’s storing all receipts in a shoe box or using an online tool or mobile app to keep track of your rental property expenses, begin to make a habit of tracking expenditures so it becomes second nature. When it’s time to file your annual Section 216 Income Tax Return provide these expenses to your accountant for scrutiny.
Deductible expenses are often left unreported on the Section 216 Income Tax Returns because homeowners are uncertain about the expenses that are eligible. The Canada Revenue Agency (CRA) offers a number of tax-deductible categories for your rental property, we’ve noted these below with a few examples for you.
Interest: Usually the interest paid on a mortgage loan is the largest expense for many. In addition to mortgage interest, if you have taken another type of loan that is related to your rental property then you can deduct this interest as well, for ex. a HELOC, a private loan, etc. You will require paperwork though.
Management Fees: If you’ve engaged the services of a property management company or hired an individual property manager, their fees are deductible.
Property Taxes: Whether your property taxes are paid by you or your mortgage company, you can deduct property taxes assessed by a province, territory or by a Canadian municipality that are related to your rental property.
Insurance: Annual homeowners insurance and rental property insurance is a deductible expense.
Maintenance & Repairs: Ongoing maintenance and repairs comes with ownership of a property, these include: painting, HVAC repairs and filter changes, plumbing, lawncare, labour costs, fixture repairs etc.
Home Improvements: Expenses under this category are different than maintenance and repairs that focus mostly on day to day comfort and function and typically have a smaller cost. Items included under home improvements would be for renovations to the property that increase the overall value, as well as bigger ticket replacement of item such as HVAC or roofing, etc. These costs may be categorized as a Capital expense and only depreciation will be expensed in the current year at a prescribed rate and period.
Utilities: This includes gas, hydro, water, hot water tank rental, cable and other applicable utility services.
Advertising Costs: Costs related to advertising your property for rental; this includes online rental ads, signage, print advertising, banners, and other rental related advertising.
Legal, Accounting and Other Professional Fees: A good reason to file your annual Section 216 Income Tax Return is that your accountant’s fees are deductible. If you’ve engaged a paralegal to serve legal notices or hired a Sherriff to evict tenants, these fees are deductible as well.
Travel: Depending on the number of rental properties you own the motor vehicle expenses are deductible. Note your total travel expenses may not be deductible, rather the cost of getting to and from your rental property to collect rents, supervise repairs and oversee management.
Salaries, Wages, and Benefits: If you have employed maintenance personnel or others to take care of your rental property, you can deduct the amounts paid to these individuals.
While the above categories only include a few examples of deductible expenses, owning a property exposes you to a number of scenarios and a variety of expenses. Moreover, expenses are further categorized into two categories; current expenses and capital expenses. Provide all property related expenses to your accounting team to verify whether they are deductible and if considered a capital or current expense.
Please keep in mind that as a non-resident earning rental income, the CRA requires you to remit non-resident withholding taxes at a rate of 25% on the gross rental income earned in Canada. While paying 25% of the gross rent can be a hefty amount, the CRA allows you to have a Canadian Agent and file an NR6 Undertaking, which then allows you to remit 25% of the net rental income as withholding tax. Once you file the Section 216 Income Tax Return and include all of your deductible expenses, you are then refunded any overpayment of withholding taxes for the year.
As an expat it can be difficult to navigate through the world of non-resident and global taxation, especially in cases where you earn income in multiple countries and have the requirement to report your total income in all of these places. We highly suggest working with industry experts who are experienced in international taxation to properly guide you through your journey.
[Disclaimer: Please keep in mind that everyone’s specific situation is unique. Always seek the advice of a qualified tax advisor. Trowbridge has been providing tax expertise for over 15 years, on a global basis, and provides this article as general information, believed to be correct at the time of publishing. This information should not be used without consulting a tax specialist].
Client Services and Business Development, TROWBRIDGE
Tel: 416.214.7833 x119 I TF: 1.800.855.856.0TAX (0829) I email@example.com
Arun (Ernie) Nagratha,
Tax Partner, TROWBRIDGE
Tel: 416.214.7833 x102 I TF: 1.855.856.0TAX (0829) I firstname.lastname@example.org