Ilchester, Somerset · Member since 2016 · 16 posts · 3 votes
Hi guys,
I'm fairly new to bigger pockets and haven't seen a thread on Canadian tax benefits to investment property. I'm originally from the UK with a small portfolio and am now looking to relocate to the Nova Scotia area. I have put some research into this but as we all know, experience out ways research any day of the week!
Is there anyone out there that has dealt with tax returns on investment property in Canada? Any advice/tips would be greatly appreciated.
I'm not certain what sort of tax benefits you have in mind. If you hold property in your own name, it's treated like any sole proprietorship - income is taxed at your marginal tax rate; business expenses can be deducted against income. If you bought an investment property which was loosing money - say the operating expenses were exceeding income due to high vacancy - you would be able to deduct those expenses against all your income (including that from employment).
As for a tip, find yourself an accountant. The Canadian tax system is notoriously detailed and, once you step outside the realm of a simple tax return, you run the risk of "missing" things that could benefit you (or cost you extra).
I'm not certain what sort of tax benefits you have in mind. If you hold property in your own name, it's treated like any sole proprietorship - income is taxed at your marginal tax rate; business expenses can be deducted against income. If you bought an investment property which was loosing money - say the operating expenses were exceeding income due to high vacancy - you would be able to deduct those expenses against all your income (including that from employment).
As for a tip, find yourself an accountant. The Canadian tax system is notoriously detailed and, once you step outside the realm of a simple tax return, you run the risk of "missing" things that could benefit you (or cost you extra).
Investor · Windsor, Nova Scotia · Member since 2015 · 128 posts · 34 votes
10y
@Phillip Johnson - Roy said it perfectly! Get a good accountant! You can deduct a lot of things on your tax return - especially if you're organized. I keep a log of gas used, mechanic bills for car, cell phone bill, partial meals if you're talking business, etc. I definitely recommend a very good accountant.
Thanks for the replies, I hear you both on the accountant... I learned that from my last property, I did everything myself from writing up contracts to tax returns (what a headache).
I'm leaning toward going incorporated so I can get liability insurance but I know the tax bracket goes up (if I'm not mistaken). Another option, that I'm a bit fuzzy on, is putting the property loan into my wife and I's names instead of just me to split tax... This isn't something I'm familiar with so it would be a new avenue to stroll down.
We'll be moving to Hammond plains, NS (Moncton, NB is also an option) due to my job (engineer) but looking to invest in multi plex in Halifax and Fredericton near universities.
Investor · Windsor, Nova Scotia · Member since 2015 · 128 posts · 34 votes
10y
@Phillip Johnson - very cool! Roy can tell you LOTS about Fredericton!!! Well, he can tell you lots about anywhere to be honest!!
The incorporated thing - from what I understand - will only make sense once you're past that highest marginal tax bracket......as you're right, it (incorporated entity) gets taxed at a high rate.
I have all my properties in my wife and my name. Income splitting there is excellent as my wife makes quite a bit less than I do.
I am nOt saying that I'm right - but my path has been to keep all properties (17 units as of next week when i close on a new place) in personal names. It has worked well for my wife and I.
Halifax is fairly expensive at the moment - especially in around Dalhousie and Kings College (which was originally in Paul's hometown). Out by Mount St Vincent, things are a little better priced.
Fredericton is also quite fully priced, but things are starting to ease on residential (1-4 unit) properties. Moncton is also worth a look.
We invest primarily in student accommodations are dancing on a couple of multi-unit and portfolio offerings - we won't be able to take them both down (our partners and private financiers do not have sufficient appetite, thus far).
Send me a note and I can provide you more information about what is in-play.
That's probably an option I'll explore as it does make sense tax bracket wise, is there a way of getting liability insurance whilst operating that way? I know in the UK it's only landlords insurance (unless you become a Ltd Company) which doesn't cover major accidents and lawsuits.
Wow, congrats on the 17th! That's a goal I'd love to work towards. Good job!
Investor · Windsor, Nova Scotia · Member since 2015 · 128 posts · 34 votes
10y
Cheers, Phillip.
Again, I don't know with certainty - and this needs to be confirmed but in my insurance policy - I have a section for legal liability. As to the exact specifics of what that covers - I need to check!!
Hope that helps! Keep us posted when you're thinking of coming over!
Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes
10y
@Phillip Johnson I would add in that if your expenses can't decrease your rental income to zero, you can take a certain amount of depreciation that usually will reduce your income to zero. Depreciation cannot make you have a loss though, so you can't use depreciation to bring a properties income below zero to reduce taxes elsewhere.
Also, any depreciation you take will need to be paid on sale in the form of recapture, assuming you don't actually sell the property at the depreciated value.
Property Manager · Halifax, Nova Scotia · Member since 2016 · 2 posts · 3 votes
10y
@Phillip Johnson Hi Phil, I own a property management company in Halifax who focuses on Rooming houses/student accommodations. I am also a licensed insurance professional in Nova Scotia.
I wanted to add that you do not have to have an incorporated or Ltd. company in order to purchase a commercial general liability policy. If you have a liability exposure, there is an insurance market that will cover you.
If you have any more NS insurance related questions, or on student accommodations/rooming houses, feel free to reach out.
So you can only depreciate to the amount you owe on the mortgage? This is pretty new to me and would love to know more on it, I'll put in some research soon. Is it a fairly straight forward process?
Do you guys solely focus on the Halifax area? That's great news, in the UK you're so limited on landlord policies if you're not a Ltd company so it really sounds like this business could be much easier in Canada (phewph). I appreciate that, I'll definitely let you know.
The rental search tool is growing to be nationwide (<link removed>). As PM's we serve Halifax, Dartmouth, Bedford, Sackville and surrounding areas. There are some great student housing options available in Halifax near the universities right now. Good luck in your move and investment search!
Please drop by the New Member Introductions forum and tell us all a little bit about yourself. On your way there, take a minute to read the House Rules - solicitations and advertisements may only be posted in the Real Estate MarketPlace; this provides folks with a pressure free environment to ask questions, discuss, and learn.
Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes
10y
This really depends on where in Canada and if you plan to live in Canada.
I happen to own in Vancouver and would not recommend it. Non-residents are taxed 25% higher than residents and in Vancouver there is blanket rent increase limitation. Here's more info on the limitation: http://www2.gov.bc.ca/gov/content/housing-tenancy/...
Far from a benefit! Also, extremely strong tenants' rights.
On the flip side, appreciated nicely. But you know, can't pay the bills on appreciation...
Specialist · Toronto, Ontario · Member since 2016 · 564 posts · 425 votes
10y
@Phillip Johnson The mortgage doesn't affect depreciation. For the mortgage, you can deduct the interest portion as an expense, but not the principal pay down portion.
For depreciation, here is an example. You buy a SFR for $150k. $50k is attributed to land value (cannot depreciate) and $100k is attributed to building.
You rent it out, and get $20k in gross rents (which is very good return). Your expenses, including interest expense, are $15k. So you have $5k in net income that you would need to pay tax on. However, you can depreciate a certain amount of the building value every year. I believe most SFR are 4%. So you could deduct $4k as a depreciation expense, and only have a net taxable income of $1k.
You don't actually spend the $4k, it is only on paper. If you do any improvements to the property, they cannot be deducted against your income, but rather added to the value of the building, which will allow you to depreciate more, or have a smaller gain on sale.
The depreciation also gets recaptured on the sale, so you usually need to pay tax on it when you sell the property, assuming the property value hasn't actually gone down. So depreciation basically allows you to defer paying some taxes for a while.
I should also note, if you take $4k in depreciation in one year on a building that was $100k, you would have a new base of $96k, and would only be able to deduct 4% of $96k.
I'm not a tax expert though, so definitely speak to one.
@Roy N. should also be able to clarify if anything is incorrect.
Investor · Halifax, NS · Member since 2015 · 1 post · 0 votes
10y
Hey Everyone,
I have a registered corporation left over from a previous business. I am planning to register a new business that manages properties and does flips. The only clients I have at this point are rentals that my family and I own. Is there a downside to using the Corp. other then the separate tax return?
I am getting mixed answers from various accountants. Also can someone recommend a great real estate accountant in Halifax?
Developer · Vancouver, British Columbia · Member since 2014 · 122 posts · 26 votes
10y
@Mimi H. Strong tenant rights are all across Canada I thought? As you found out in another post you can increase rents higher than the set rate by cycling through tenants on 1 yr fixed term lease.
Also there are cash flow properties in Vancouver and across BC - I just bought one.
I feel your recommendation is more related to your personal situation than a blanket recommendation. Maybe someone as a resident, who bought a cash-flow positive property, had good appreciation (added bonus) and recently cycled through a tenant and increased your rent 7% would you say otherwise?
Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes
10y
@Pawan J. I'm not familiar with the rest of Canada so I have no idea. I have heard that it's also strong in Toronto but I honestly couldn't say. And yes, of course it's my personal experience.
At the end of the day, everyone needs to make their own decisions on what's right for them. I'm just highlighting some of my personal challenges in hopes that others walk into the situation better informed. And specifically that I wouldn't recommend for people who are non-residents. It was mentioned that the person is from London so my presumption is that he's not a resident.
As for the situation that you've described, that's a lot of "ifs". I didn't say that I don't have great appreciation. It's Vancouver so it's seen a boom for sure.
And no, I would not say otherwise for my personal situation, I'd still be taxed 25% higher than a resident.
It's worth noting that I adore my tenant. He's done a great job in taking care of the place and even if he's a little below market rent wise, he's a joy to have. When there are so many nightmare tenants, I count my blessings!
I'm not sure what you mean by "cycling through tenants". Tenants automatically go month to month after the lease expires. So if what you mean is to kick them out for no cause so you can raise the rent for another tenant, no, you can't do that. I'm pretty sure that's illegal (and personally, I find it unethical). I'm not the expert on this, you may get further by looking here: http://tenants.bc.ca/
Lastly - it wasn't a "don't do this or that", it was a here's my experience - I hope you get something from it. Maybe what you learn is that's exactly the climate that you want to be in.
It's like arguing about the best color. It differs for everyone and that's what makes life beautiful. I'm simply trying to point out that there's a shade of pink that might be worth checking out or that I find blinding to my eyes, I'm not arguing that it should be your new favorite color or that you should avoid it. Hope that clarifies things.
Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes
10y
One more thing, I have heard that there are tax credits for resident investors for small companies - not sure if that applies to real estate and it -might- only be for Vancouver. I'm still waiting for some info - will share if I ever get it. :)
Developer · Vancouver, British Columbia · Member since 2014 · 122 posts · 26 votes
10y
Hey @Mimi H. thanks for the explanation. I know many folks who have and are investing for long term in Vancouver and BC and doing well.
re the rent increase, when you sign a lease you can have a fixed term whereby the tenant must move out after the fixed term. It is my understanding that you can then re-advertise the property at a new rental price which could be more than the set rate as its a completely new lease. Should you choose a lease that goes month to month at the end of the term then you can only increase by the set rate and with 3mnths notice. This was my understanding from what I read.
Hence it would be ok for your tenant to re-apply each year along with others at a new market rent if you so chose to.
Of course this wouldn't be the case year after year as Hopefully you have a good tenant and just go the set rate but in some cases you have the option to increase more using a fixed term. Maybe I'm wrong...?
Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes
10y
hey @Pawan J. I don't believe that's the case (re: lease expiration) in Vancouver. The rent can only go up once every 12 month with a 3 month notice. Someone in one of my earlier posts had some very specific details on this (and was much better versed down to the terminology). And actually several Canadians were quick to jump in and clarify... now I just need to find that post somewhere! Also, it's worth mentioning that my property is professionally managed by a reputable organization which manages a fairly large portfolio and they had the same info. The best way to know for sure if to just call them. Let us know what you find out when you do.
Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes
10y
Oh here;s the thread - and you're already on it so perhaps worth a re-read? Some of the folks on there had some great details around rent control, timing, etc.