How to lower the amount of taxes you pay on income properties

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Everyone wants to pay less taxes! Is there anything that can be done concretely at the end of the year to soften the blow?

There are major differences between owning your personal residence and an income property that you rent out. These differences are also reflected in the taxes you pay, based on whether you own that building as a corporation or under your real name.

For income properties, the law allows you to take out an amortization expense, which is a fiscal expense of 4% on the depreciating balance of your capital cost. The law also allow you to add another expense in order to lower the fiscal load and to counter the “obsolescence” of a property. Be warned that when re-selling the building, you will likely be taxed on the amortization sums that have been deducted since purchasing the building. It constitutes a tax carryover rather than a permanent deduction.

Tax law is complex, and it’s imperative to analyse a situation before jumping into it. We recommend consulting with a professional.

Your personal residence

Unfortunately, there are no tax-deductible expenses on your personal residence. Interest fees tied to your mortgage are not deductible, either. The easiest way to slow down your personal taxes is to purchase an RRSP before the end of February.

There also exists a federal tax credit of up to $750 applicable with the purchase of your first home. You don’t even have to actually be purchasing your first home to be eligible for this credit! The most important is that you or your partner has not owner another home in the previous four years.

One last point to remember: if you’ve purchase a new home, have you asked for the TPS/TVQ credit from Revenu Québec?

An income property held in your name

When you own an income property under your own name, the end of the year comes on December 31st. Many of the expenses tied to an income property are tax-deductible, which means that any income you make from renters will be considered a salary, but that all expenses can also be deducted in the same fashion.

If you were planning to have some expenses in January or February, it would be preferable to put it through in December. This way, you can lower your yearly income and end up paying less taxes. Here is a list of potential expenses that can lower your taxes:

  • replacing windows or doors;
  • renovating or painting a dwelling, covering the floors or changing the cupboards;
  • renovating the common areas;
  • repairing or replacing a furnace;
  • repairing electrical or plumbing problems
  • replacing the hot water tanks.

According to tax advisor François Drouin from Fiscalliance, the end of the year is the perfect moment to explore the possibilities of transfering your holdings into a joint-stock company. The rules are complexe and each case unique – consulting a specialist remains the best option.

Your income properties held by incorporation

This is a very different case, as the end of the year doesn’t necessarily fall at the end of December. In this case, you define your own end of year. Some prefer spreading out the year-ends between their different companies, while others prefer coordinating them in order to handle all the financial affairs simultaneously.

Taxation for an income property held through incorporation is roughly 47%, which is quite high. If the funds are available within the company, it is sometimes advantageous to complete renovations before the end of the fiscal year and thus lower the amount of taxes owed.

My advice:

  1. Discuss any expenses you’re unsure of with your accountant.
  2. Try to plan renovations a few months in advance in order to get quotes from a few different contractors and pick the best price.
  3. Consider the season; redoing the roof in December isn’t the best timing.
  4. Place a reminder in your agenda for the following year in order to plan ahead for upcoming renovations.

Written by Ghislain Larochelle, MBA eng., coach and eral estate trainer for Immofacile.ca

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