Rental properties

Many Canadians are investing in real estate for the rental income and growth potential that can be provided. Others decide to use a portion of their homes, or a second property such as a cottage, to generate rental income.

In any case, you will have a variety of tax implications to consider when generating rental income on an annual basis and when the rental property is eventually sold.

The potential to earn rental income is a big reason why many people get involved in real estate.

As far as tax goes, any rental income (net of expenses) you earn in a calendar year is reported on your personal tax return and taxed at your marginal tax rate.

On the other hand, if you have incurred a rental loss (where expenses exceed gross rents), these losses can be used to offset any other income you’ve reported in the year, such as employment, investment, or business income.

Since rental losses can potentially mean large tax savings for taxpayers, the Canada Revenue Agency (CRA) has attempted to deny rental losses in certain cases where there was no “reasonable expectation of profit” (REOP). In addition, there are special rules pertaining to the types of expenses that may be deducted against rental income.

In this bulletin, we explore some of these issues and identify tax-planning opportunities to minimize any future tax liability.