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:
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.
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)
Odds and Ends
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.
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).
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.
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
- 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).