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Preparing for the Income Tax Deadline: Small Business/Rental Properties

As mentioned in my last article about preparing personal taxes for the income tax deadline, there are a few differences between preparing to file your business/rental return and personal taxes.

If the business is a sole proprietorship, then the business and personal tax are both filed together.  If the business is a corporation, then the business is treated as a separate entity and will need its own return.  Regardless of legal structure, the information required to file is quite similar.  That is, the business owner will need to collect all records of income and expenses.

Here is some of the paperwork required to file:

Small Business

Income

Business revenue – Revenue from the small business is required to be tracked.  For me, I track all income sources on a monthly basis.  Note that Canadian businesses who collect revenue from US sources will need to do the conversion to CAD.

Expenses

Claiming expenses is where it gets interesting as it reduces income reported.  If you have a home based business here are some potential tax deductions:

  • Business capital costs (via CCA) (ie. computer, office furniture, tools, equipment etc)
  • Business expenses (internet access, rent, utilities, telephone, cell phone, bank fees, hosting charges, salaries, cpp etc)
  • Home office deduction (% of mortgage interest, property tax insurance, utilities etc).
  • Vehicle (either $ km flat rate, or % used for business)
  • Meals (50% of business meals can be claimed)
  • Travel

Odds and Ends

GST/HST

If you made over $30,000 during the year, then you are required to register and start charging GST/HST to your clients.  For sole proprietors, GST/HST remittance is due on or before April 30.  For corporations who file annually, GST/HST is due within 3 months of year end.

T5/T4 slips

If you are a director in a Canadian Controlled Private Corporation (CCPC), then you are required to issue T4 (salaries) /T5 (dividends/interest) summaries to CRA no later than the last day of February.  Steep penalties are applied to late summaries ($25/day up to max $2500).

Rentals

Income

Income is pretty straight forward, pretty much your monthly rental income collected multiplied by the number of months collected.   The details are in the expenses claimed.

Expenses

Real estate investors can claim quite a few expenses to offset rental income.  Here are some to consider (more details here):

  • Mortgage interest
  • CMHC fee when buying
  • Lawyer fees
  • Property/water tax
  • Fire insurance
  • Maintenance/repairs
  • Utilities (if you include them in the rent)
  • Snow clearing, lawn mowing
  • Capital improvements (washer/dryers, fridge/stove, furniture etc)
  • Vehicle (exceptions)

It’s very common for expenses to exceed rental income, especially for landlords in the bigger cities.  My understanding is that you can claim a loss for the first few years of owning the property but CRA will expect you to turn a profit sooner or later.  Remember that sole proprietor business losses can be claimed against other income (like salary).

If you haven’t filed already, check out my QuickTax and UFile review.  The income tax deadline (Canada) is April 30, 2010.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 11 comments… add one }
  • Dividend Lover April 19, 2010, 12:35 pm

    other expenses you could expense against rental income

    – office supplies ( for the paperwork )
    – safety deposit box ( thats where you keep the post dated cheques )
    – banking fees
    – advertising expense ( putting up for rent sign or paying for a listing)
    – entertainment ( you went to a restaurant to discuss with someone something related to the buisness )
    – cell phone ( you need the tenants to be able to call you in case the place is on fire )

    the more rentals you have., the higher theses expenses can be.

  • Elbyron April 19, 2010, 2:12 pm

    FT, you didn’t mention CMHC and legal fees in your 2007 article. Line 8860 seems to be where you would claim the legal fees, but if those fees are for the purchase of the property, you can only claim a proportion equal to the amount of the total value (building + land) that is for the building. I couldn’t find anything about deductibility of CMHC fees on the CRA website, but am I correct in assuming that they would also be subject to the proportion rule as above?
    And on what line would the CMHC fees be claimed?

  • FT FrugalTrader April 19, 2010, 2:25 pm

    Elbyron, I have an accountant doing my taxes this year and he mentioned that CMHC can be used to increase the adjusted cost base of the home. So I’m not sure if it’s a deductible expense against income.

  • DS April 19, 2010, 11:58 pm

    Can someone confirm that condo fees may be claimed?

    As these are a ‘business expense’ and are typically inclusive of many other claimable expenses (external maintenance, upkeep, snow removal, lawn care, structural insurance, etc).

    Thanks
    DS

  • CA Student April 20, 2010, 4:20 am

    Condo fees can be claimed as an expense.

    CMHC fees can either be used to increase the adjusted cost base
    of the property or can be expensed over a five year period.

  • No Debt Guy April 20, 2010, 10:06 am

    Condo fees are an expense and can be claimed.

  • DS April 21, 2010, 3:19 am

    Thanks for the response. Just though of another question.

    Capital improvements such as appliances, maintenance, etc may be claimed – but what about large renovations vice expected upgrade/replacement?

    Example:

    – A high and dry basement (cement walls and floor, open ceiling) completely finished into livable area.

    – If so, are there limitations on what may be claimed – how much was spent relative to the property value, materials only, labour only…?

    – If everything may be claimed what if you are developing a piece of raw land to build a rental home – what may be claimed in that case? What are the limitation in that event?

    Thanks again in advance!

    Cheers
    DS

  • FT FrugalTrader April 21, 2010, 6:51 am

    DS, capital improvements would need to be claimed under CCA.

  • Future Money-Bags April 21, 2010, 9:05 am

    Can’t wait to start using Business and rental property deductions for 2010!

    I LOVE all the ‘tax saving tips’ that I am seeing all over the internet in the past 2 years. Before that, there was practically NO advice to saving money on taxes.
    FT you are making taxes seem a lot easier than most people fear them to be, great tips! It’s like a p/t job managing your taxes, can save you so much..

    :)

  • Financial Cents April 21, 2010, 10:48 am

    Great article Frugal!

    @DS – you should consider whether or not you really want to claim CCA. If you claim, my understanding is you cannot add the renovation to the value of your property. Otherwise, you’re double-dipping. For example, we renovated the bathroom in our home before we turned it into a rental. We didn’t claim CCA that tax year. We considered this would elevate the total value of the unit; and it did. About 3 years later, we sold the rental. The value of the unit appreciated quite a bit (the bathroom helped), and because we had many expenses with the condo sale (lawyers fees, brokers fees) our capital gain was virtually nil on the unit.

    In my opinion, using CCA really depends on how long you’re going to hold the rental and what type of appreciation the unit may yield.

    Although Frugal is VERY knowledgable about small business and rental properties; I would assume his normal tax and accounting disclaimers still apply :) That said, I would suggest folks in the rental business, get a copy of Douglas Gray’s book. It’s a nice overview of rental properties and tax information that all landlords should be versed with. I’m not promoting only his book per se, I just know it’s one that helped me.

    http://www.amazon.ca/Making-Money-Real-Estate-Residential/dp/0470836202

    Besides, you can claim the book as an expense! :)

  • Rebecca May 2, 2010, 12:13 pm

    How to claim vehicle expense in terms of a flat km*$0.52? Quick tax only provided the option to claim % of vehicle expense based on km for business vs. km total. Which form do I go to?

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