When making investments, it's essential to focus on the numbers. Suppose you want to get the most value from your money through investments since Canada's income taxes are very high. In that case, you'll need to look at the big picture, which includes the potential tax implications, before making any decisions.
Real estate is an excellent investment asset type. It's not only because you can get the best loan interest rates. Not only because you have the most significant leverage available. But partly since investing in real estate comes with tempting tax advantages. So, in this blog, we will walk you through the fifteen best tax strategies available for Real estate investors in Canada.
1. Capital Cost Allowance (CCA)
A capital cost allowance, often known as a CCA, is a tax deduction that can be used to offset the cost of depreciating your company or property. It helps offset some of the maintenance expenditures associated with wear and tear, breakdown, replacement, or any other variables that contribute to the depreciation of your assets.
And it's important to remember that one can't deduct the overall cost all at once. Instead, you'll have to claim it in small amounts over a number of years.
2. Deductible Expenses
A proper record of deductible expenses should be kept by real estate investors for claiming tax deductions of expenditures related to rental income at the end of tax years. Such expenses include:
- Insurance Expense
- Advertising Expense
- Office Expense
- Repair and maintenance
- Management and administration
- Salary and wages
- Travel
- Utilities
- Motor Vehicle
- Other deductible expenses
3. Joint venture
A joint venture is a strategy where two or more investors pool their investment, resources, knowledge and abilities to reduce risks and gain a competitive edge, share their profit and loss, and participate in a real estate project together.
4. Refinance
When you refinance the property, there are no tax effects right away. However, in Canada, you can only deduct the interest you pay on money you borrowed to invest. Similar to the deductibility of mortgage interest, interest on rental income-producing expenses can also be removed.
5. Prepaid expenses
Prepaid expenses have been paid in advance, but services haven't been incurred yet. You can save money on your taxes for the current year by taking deductions for costs you have already paid for.
6. Tax Credit
The government gives money in the form of tax credits. It lowers the overall tax liability of an individual. Out of several tax credits, Canadian real investors rely primarily on the Scientific Research and Experimental Development (SR&ED) tax credit, GST/HST new housing rebate, Home Accessibility Tax Credit etc.
7. Picking the right time to sell your investment property
Since the property's value may increase yearly but isn't realized until you sell it, the capital gain from a sale may be huge.
You might want to consider selling your house When you expect a decreased annual income, such as during maternity leave, layoffs, or retirement. The tax amount imposed at higher tax brackets can decrease this way.
8. Rental Losses
In the same way that company profits can be used to offset other types of income, rental losses can do the same thing. If the amount of money you lose through renting out your property is greater than the amount of money you get from other sources, then your loss is deemed to be a "Non-Capital Loss," and it can be carried backwards or forwards to reduce the amount of taxes you owe for years gone by.
9. Deferred Tax
A tax obligation postponed until a later date is a delayed tax burden. Because of the difference in the time the tax was incurred and when it is required to be paid, the obligation has been put off later. When investors avoid recognizing their revenue for tax purposes, they may have deferred tax liability.
10. Tax-free saving Account (TFSA)
A tax-free savings account (TFSA) is a type of savings account available to residents of Canada. Within a TFSA, all contributions, interest earned, dividends received, rental income and capital gains from the sale of real estate are exempt from taxation. The money that is withdrawn from it is also exempt from tax.
11. Registered Retirement Savings Plan (RRSP)
A registered retirement savings plan (RRSP) is a retirement account registered with the Canada Revenue Agency. It can help reduce your tax. One can consider using RRSP for investing in real estate, as any income earned in this contribution is free from all taxes until and unless the money is withdrawn.
12. Principal Residence Exemption (PRE)
The principal residence exemption (PRE) is a tax break that lets you pay less or no tax on capital gains when you sell your principal property. The PRE can only be used on one property per family unit, which includes you, your spouse, and your children who are not married. For your property to be considered a principal residence, it must be occupied throughout the year.
13. Incorporation
Incorporation refers to the legal procedure to establish a corporate organization or firm. The benefits of incorporation include Raising capital and sharing losses, a separate professional image, and a transferable and continuous lifespan as the owner does not limit it. In Canada, the tax rate on corporations is lower than the tax rate on individuals.
14. Proper record keeping
Keeping proper and organized records is essential for managing business expenses, helps in understanding your finances, keeps an appropriate track of incomings and outgoings and enables claim deductions.
15. Tax Professional
Investing in real estate can be stressful and hard to understand, especially for someone starting independently. Instead of trying to do everything yourself, ask an expert in the field for help.
Many experienced real estate owners offer services to help new investors get off to a good start. They can act as guides and help you through the whole process of investing.
Conclusion
There are many things to consider and keep track of when dealing with real estate, especially regarding taxes. These tips can help real estate agents and investors make sound financial choices.
Working with a real estate agent or a qualified accountant can help you save money and prepare for the next tax season. As an investor, you can continue to grow your wealth once you understand the different strategies and planning choices.