Dear Urbaneer: How Might CRA Taxation Affect The ROI Of An Investment Property?

Dear Urbaneer, Finance, For Buyers

Welcome to this month’s installment of Dear Urbaneer, where I answer questions and concerns from inquisitive readers and clients. This month, I offer advice to a Buyer wanting to understand how CRA (Canada Revenue Agency) taxation is factored based on how the income and expenses are reconciled, remitted, or deferred until the time of its sale.



Dear Urbaneer:

As I search for an income property to add to my investment portfolio, your helpful and informative posts demonstrate I need to be mindful of how its income & expenses are as important as its price appreciation to realize a solid return on investment. Do you have any advice when it comes to Revenue Canada’s taxation of investment properties, including what to expect, and what I should be aware of?


Doing My Due Diligence



Here’s my reply:

Dear Due Diligence:

I always applaud any one who begins their property hunt by completing their due diligence, because achieving success creating a real estate investment portfolio requires strategically reconciling, remitting or deferring taxes based on your own particular financial circumstance.

It starts by understanding all of the costs and expenses associated with a property investment that will let you calculate profitability based on your intended time line, and whether the acquisition will might meet your investment objectives or not as the case may be. This includes being hit with unexpected expenses associated with the property, including the repair or replacement of major building components that squeeze your margins, and your obligation to remit Income Tax on the net revenue generated as well as the Capital Gains Tax payable when you dispose of the asset. All of these can erode your return so it’s wise to anticipate them – as well as look for ways to reduce what you’ll owe.

Although no investment is a “sure thing”, real estate has shown its mettle as an investment vehicle over the years. If you employ a cautious investment mentality that includes in-depth research into all the mitigating factors specific to each investment property purchase, you can prudently build wealth. 

Because most types of investments – including real estate – generate income, a property purchased that is not your principal residence is subject to taxation. So it’s critical to know what taxes are associated with any investment vehicle and what options and exemptions are available to you. The complexity of this is oft-misunderstood and underestimated, and at times a neglected part of due diligence when it comes to fully understanding the true costs of property investment. (Here is Revenue Canada’s rental income guide).



Seek Counsel From Shelter Experts, Including A Lawyer & Accountant

The first question you need to answer is whether the income you earn from a real estate investment property will be reconciled through Revenue Canada as income derived from renting property or as income generated from a business, since each have different tax implications.

When you’re claiming property income as an individual, the income must be limited to basic services like renting the parking spaces or the revenues from coin laundry, and the expenses you can claim are limited to utilities and operations. If you provide additional services or rental perks like a welcome package, fresh flowers, weekly cleaning, or a concierge service, then those expenses can only be claimed as a business. 

If you structure it so your corporation owns the property, then the rental income will be considered as income from property unless the corporation has six or more full-time employees. This is critical because active business income in a corporation will be taxed at a more favourable rate than income from property. But it’s also important to understand that while mortgages can be secured by an incorporated business, a partnership or a limited company, securing one is more complicated than a residential mortgage, and that the size of the down payment required and the interest rate offered by a lender may be higher based on the assessment of your company and its credit worthiness. 




Build Your Team Before You Begin

There are steps and strategies you can take to alleviate (or defer) the tax burden associated with a property investment. Tax laws, no question, are complicated, and many situations warrant analysis and assessment based on the specific circumstances of the individual and the property in question- all compelling reasons to seek advice from a professional.

In other words, engage with experts who can offer guidance and counsel with the acquisition, operation and disposal of your real estate purchase. This doesn’t just mean working with an experienced well-informed realtor, but getting the sage advice of a real estate lawyer, an accountant and an expert in property management to help you understand the ins and outs of your property investment.

Keeping that in mind, here are some general guidelines!




Focus On The Paper Trail, Documenting Everything

In order to benefit from any available tax deductions, it goes without saying that you need to have detailed accurate documentation to substantiate your reconciliation to Revenue Canada. Many of us will prepare summaries that we provide to our accountant who relies that the information we’re providing is accurate, just as we rely on them to file our Income Taxes accurately to the CRA.

As someone who was audited by the CRA – with a specific focus on my real estate investments – even knowing I had reconciled my income and expenses to the best of my abilities and with full transparency, my anxiety began when I received a letter (the CRA will never initiate this process by a phone call) informing me of the audit and their requirement I send all my supporting paperwork and receipts associated with their request within 30 days. 

I’m quite convinced being able to pull all this information promptly and efficiently only happens to those who are organized. I’ve learned that those who proactively subscribe to preparedness have an area of their home dedicated to storing personal and property information, such as stocks and investments, insurance policies on people, properties and cars, estate wills and organ donation cards, and the past six years of tax filings with accompanying detailed records bundled with organized receipts.

When the CRA audits you on your real estate investments, they require you provide everything relating to your property to show how you arrived at the sums you submitted in your claim. This includes a detailed summary of income received, any periods of vacancy, and confirmation of the rent rolls of existing and new tenancies, as well as detailed statements itemizing your expenses demonstrating the utility costs, mortgage interest deductions, existing property services like  landscaping and snow removal contracts, advertising and shelter platform costs like Airbnb, all maintenance and repairs, the replacement of major building components and upgrades or improvements. Every line item you claimed must be supported by invoices, receipts, bank records, contracts or any other supporting documents that might be relevant. If you purchase anything for your investment property keep the receipt and discuss with your accountant if it can be claimed.

The CRA closely examines the bookkeeping and supporting records of a taxpayer to ensure they are meeting their tax obligations, correctly abiding tax laws, and receiving the correct credits and refunds. If you paid cash for a repair and you don’t have a paid invoice the claim will be denied. If you submit your charge card statement to prove a purchase you claimed but you can’t produce the receipt, it will not be accepted. There is no grey area here. If you can’t fully corroborate with paperwork, you can anticipate the CRA to adjust your claim and recalculate what you owe.


*LOL. Smart kids!


Separate Property, Separate Financing

It’s not unusual for the owner of their primary residence who has amassed sufficient equity to take out a HELOC (Home Equity Line Of Credit) against their dwelling and use those funds as a down payment for an investment property. The owner will get a tax benefit, because the loan interest is tax deductible.

It’s also a solid strategy to building wealth, because if you funnel the rental income generated from the investment property back into paying down the HELOC, over time you can continue extracting equity to make further investments. In other words, your principal residence can become a tax deductible ATM when you can demonstrate the funds are used for investment.

However, borrowers who use their HELOC for both personal and tax deductible debt may find themselves coming under scrutiny by the CRA who may, when reassessing your tax claim, deem any repayments you made to your HELOC as servicing your tax deductible debt first instead of your personal debt. In this regard, it’s critical to separate your mortgages or lines of credit into multiple accounts to allow for easier tracking and less confusion.



Maintenance & Repairs

You may be eligible for deductions made for expenses in making repairs to a property. Careful though – there is a difference from a tax perspective between “repairs” and “improvements”. Essentially, repairs contribute to the overall maintenance of a property to keep it in proper working order , without significantly increasing the value of the property (which an “improvement” – like adding an extension or installing skylights would do).

For renovations (for things like structural improvements, or making a property accessible for someone with disabilities, for instance), there are potential deductions as well, but they are treated differently (which is explained in greater detail in the Revenue Canada link – also above).

Incidentally, if you’re buying a freehold property that is older than ten years, now would be a good time to find a contractor and/or handyperson to engage, whether its to assess the condition of the dwelling in advance of your purchase or to complete maintenance, repairs or renovations to the property. Although as a listing realtor I always provide a presale inspection report as I share in The Benefits Of A Presale Inspection Report For Property Sellers & Buyers, many realtors do not. Unless the property you’re purchasing is with the objective of completing a substantial transformation, such that its existing condition is not of enormous importance, I’d get a third opinion before making a firm and binding offer.



Depreciation (CCA)

Although the certainty of paying taxes is for sure, property investors do have options, including the one to delay the payment of income taxes to a later date. 

One tool available for property investors is the Capital Cost Allowance (CCA), which allows the investor to elect to defer rental income from the current year’s taxation, pushing it forward to future years. It works by amortizing a portion of the cost of the rental property against the income obtained.

Revenue Canada defines it as – “the deduction you can claim over a period of several years for the cost of depreciable property, that is, property that wears out or becomes obsolete over time like a building, furniture, or equipment that you use in your business.”

Like all tax decisions, pros and cons must be considered – both in the present day and in the future, especially when it comes to what may lie in store from a tax perspective. While deferring a tax payment might seem attractive today, you are obliged to remit the amount at a future date.

When you sell your property, you could face a “recapture” of your CCA, which means that you need to add those claims that you’ve made to your taxable income. And the general rule is that you would have to recapture these amounts if the proceeds from the sale of your property exceed the remaining undepreciated capital cost. Revenue Canada defines undepreciated capital cost (UCC) as “the balance of capital cost left the for further depreciation at any given time”. The amount of CCA you claim each year will lower the UCC of the property. Capital cost is generally what you’ve paid for a property, more or less.

The key here is to really consider your time horizon for holding the property. Is this a long-term investment? Are you looking for shorter-term turnaround? Will funds from the sale push you into a higher tax bracket? Generally, the CCA as a tax deferral tool is better if your horizon extends to the long term.

This can be complicated and tricky. For a good, comprehensive of how some of the basics operate around this, visit the Revenue Canada Website FAQ’s on the CCA .




Capital Gains & Property Investor Profits

Looking to buy a fixer-upper and then flip it? While swift appreciation in property value may happen, there are tax implications that could potentially seriously erode your return on investment.

Have you read Dear Urbaneer: How Much Profit Should I Expect Climbing The Property Ladder?

Generally speaking, you should always approach real estate with a buy-and-hold mentality, so that you have time to ride out any market fluctuations. And you shouldn’t bank your ROI solely on the increase in property values, although that is becoming a more common approach than it used to. This approach creates vulnerabilities, which investors should seriously consider.

And while the market undeniably has been white-hot for years, with no end immediately (or obviously) in sight, we only have to look back to what happened to the condo market in Toronto when the pandemic first struck with the widespread lockdowns, which I wrote about in these posts An Overview Of The 2020 Toronto Condo Market And What Lies Ahead: Part One and Part Two .

It’s a stark reminder that real estate is fundamentally cyclical, and that there are forces that we can’t anticipate, despite due diligence that can seriously impact your ROI. Being cash-flow positive and having a generous timeline are ways to mitigate unforeseen risk.

Returning to taxes on your property investment, let’s talk about how they might impact your bottom line, especially if you are thinking of buying and selling in short succession.

Capital gains, which are generated when the value of a capital asset, like a property, increases in value above the price that you paid for it. The sale of your principal residence is exempt from capital gains, but your secondary properties are not. So property investors should expect to pay Capital Gains tax.

It’s important to note that if you change how the asset is used (i.e. converting your principal residence into a rental property) that is considered a disposition so you would owe Capital Gains tax on that.

Capital Gains tax rate has a universal inclusion rate of 50 per cent, which means that you remit taxes on half of the net profit. However, there is a lot of chatter in the Shelter Industry about changes in Taxation Policies, including an anticipation we’ll see the Capital Gains rate undergo increases as high as 75 per cent. With Canada’s indebtedness navigating the Covid19 pandemic, increasing the Capital Gains tax rate is considered ‘low-hanging fruit’ in terms of increasing government revenues to service our collective debt.

There are strategies to use to reduce your Capital Gain tax owing, which involve timing of property sales, considering your other income, deferring taking your profits from a property sale, income splitting, gifting, increasing tax deductions and more. These strategies hinge closely on an individual’s situation, so you are best to consult your accountant for specific advice and strategies to help reduce the amount of Capital Gains Tax you might owe. This is wise to discuss in advance of even making a property purchase, so you can anticipate what your taxes might be based on your personal circumstance and how that factors into profitability.

Here is the CRA site on Capital Gains for 2021. This is a good summary from MoneySense magazine Capital gains taxes, explained.

Again, while property investment and purchase can yield big results, things are rarely cut-and-dried, which underscores the value of good advice, research and thorough due diligence.




More Taxes To Come?

Housing was a hot-button issue across parties in the recent federal election, with promises to curtail   “excessive profits on investment properties’, with a ban on blind bidding and an anti-flipping tax. These policies are meant to help with supply and deter shadow flipping and aid with affordability by keeping the temperature in bidding wars lower. Along the same lines, could there be an increase to the Capital Gains Tax in the future? It’s possible- and even probable. Here is why:

An increase to the Capital Gains tax was actually one of the NDP platform promises during the recent Federal election. It certainly represents a sizeable income stream, raising the inclusion rate to 75% from the current 50%. This would bring in $44.B over 5 years, according to the PBO.

What is significant is that there are parallels from the time period when the Capital Gains tax was introduced in the early 1970s. The Federal government found themselves in a deficit, in need of generating substantial income to offset it. Similarly, with all the spending that has happened as a result of pandemic support, the government will need to-at some point- generate revenue.

This article Capital Gains Taxation in Canada: History and Potential Reforms provides a good summary of Capital Gains tax, its history and the possibility of changes to it to generate income for a deficit-laden government, including raising the inclusion rate and making changes to the Principal Residence tax exemption.

Housing affordability was a significant platform issue for all the parties, and continues to press homeowners (and would-be homeowners) across the country. With inflation rising rapidly and housing prices contributing to that growth, it stands to reason that there will continue to be heavy policy coming from all levels of government to assist with affordability- which may mean an increase in taxes for investors and more.




The Bottom Line

One of the issues to keep in mind that taxes (whether they raise them or not) are a consistent cost that will squeeze your margins. And if you are looking at purchasing, it is advisable to purchase a property that could remain cash flow positive and that isn’t hyper-leveraged. Anticipating costs (including increases in taxes, along with a likely increase in interest rates, making mortgage costs higher) lets you properly evaluate if a property is a good fit for your investment portfolio, overall.

Have you been thinking about becoming a property investor or about expanding your portfolio? Urbaneer has an innate sense of the market, years of expertise, as well as much hands-on, personal experience in property investment- meaning the guidance that we can provide is accurate, timely and comprehensive. Furthermore, we know that there is far more at stake when making an investment property purchase, beyond the transaction. Let us help you translate our experience into wise property purchases for you, with a no-pressure approach.


And so, Due Diligence, thank you for reading, and remember that understanding all of the costs involved in a property investment will let you best assess profitability and decide how a given property might meet your investment objectives!

~ Steve



Here are some additional posts related to the Toronto, Ontario, Canada property market that may be of interest:

–> Turning A Blind Eye To The Real Costs Of Toronto Real Estate Investment Properties

–> Shades Of Duplicity In The Foreign Buyer Tax For Canadian Housing

–> The Growing Trend Of Financial Landlords In Toronto Real Estate

–> The Role Of Fiscal Stimulus During COVID-19 And Toronto Real Estate

–> The Affordability Conundrum For Toronto House Buyers: Location, Condition & Costs

–> Dear Urbaneer: Why Are There Bidding Wars For Toronto Real Estate During The COVID-19 Pandemic?

–> Dear Urbaneer: So Why Are There New Airbnb Regulations For Toronto?

–> ‘PUSH’: A Documentary On Rising Real Estate Prices

–> The Other Side Of Rent Control And Toronto Real Estate

–> Why Does Homeownership Remain A Priority For Canadians, Despite The High Costs?

–> With 65,000 Vacant Units, Will A Vacancy Tax Be Helpful To Toronto Real Estate?

–> 7 Reasons Why Toronto Real Estate Prices Have Skyrocketed Over The Past Decade (posted in 2017)

–> Foreign Buyers, Property Prices, And Toronto Real Estate

–> Foreign Buyers, Inadequate Policy, And Canadian Real Estate



With decades of experience navigating the ever-changing Toronto real estate market, a commitment to promote the sale of properties like yours with interesting and relevant information, and the ability to guide Buyers with credible insights and well-informed guidance, we are here to help without pressure or hassle.

My team and I are here to help!



With decades of experience navigating the ever-changing Toronto real estate market, a commitment to promote the sale of properties like yours with interesting and relevant information, and the ability to guide Buyers with credible insights and well-informed guidance, we are here to help without pressure or hassle.

Please consider our services!


-The Urbaneer Team

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-8000

– we’re here to earn your trust, then your business –

Celebrating Thirty Years As A Top-Producing Toronto Realtor


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