I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. Many people have been burned by the stock market over the past decade and find the stock market a confusing and complex place. While both stocks and real estate have their own risks, some proportion of both these types of assets should typically be owned in a properly allocated investment portfolio. The determination of a property’s location and the issue as point of taxation rules 2011 pdf what is a fair price to pay for any rental property is a book unto its own.
For purposes of this blog, let’s assume you have resolved these two issues and are about to purchase a rental property. If you are purchasing a one-off property, in most cases, as long as you can cover off any potential legal liability with insurance, there is minimal benefit of using a corporate structure. Given their is no income tax incentive to utilize a corporation, when you include the cost of the professional fees associated with a corporation, in most cases, the use of a corporation does not make sense. In addition, if the property is purchased in one’s personal capacity, any operating losses can be used to offset other personal income. If the property runs an operating loss and is owned by a corporation, those losses will remain in the corporation and can only be utilized once the rental property incurs a profit. If you decide to purchase a rental property in your personal capacity, you must then decide whether the legal structure will be sole ownership, a partnership or a joint venture. One should also note that there are subtle differences between a partnership and a joint venture.
Thus, the partners share in the CCA claim. Once the rental property is purchased, you must allocate the purchase price between land and building. If you are purchasing a property and it is not in a condition to rent immediately, typically, those expenses must be capitalized to the cost of the building and depreciation will only commence once the building is available for use. Where a property generates net income, depreciation can be claimed to the extent of the property’s net income. People who have owned a rental property for a long period, sometimes reach a point in time where they have such large recapture tax to pay, they don’t want to sell the rental property. Personally, I do not agree with this position, since it is really a question of what will be your net position upon a sale and are you selling the property at a good price. However, recapture is always an issue to be considered, especially for older properties that have been depreciated for years.
I discuss these “change of use” rules in a guest blog “Your principal residence is tax exempt” I wrote for The Retire Happy Blog. Fortunately, the CRA’s powers with respect to the enforcement of this test have been severely limited. Purchasing a rental property requires a considerable amount of thought and due diligence prior to the actual acquisition. Having a basic understanding of the income tax consequences can assist in making the final determination to purchase the rental property. Bloggers Note: I will no longer answer any questions on this blog post. There are 294 questions and answers in the comment section below.