Wednesday, April 27, 2016

Tax Time – It’s a Wrap

As we are in the last week of April, tax season is almost officially over.  Hopefully by now you’ve compiled all the info, met with your tax professional (if you don’t do it yourself) and are done filing your return. Some of you will be paying your balance owing, or if your lucky, getting back a nice tax refund.

To wrap up this series on Tax Time, we’d like to leave you with a few pieces of advice and insight as it relates to taxes and real estate and some of the crossovers between the two.

Stay Organized

As a landlord especially, you have lots of money coming in and going out every month. It’s important to stay on top of the paper trail so it can all be properly input at tax time. It’s much easier to do a little bit regularly, monthly or quarterly, than to leave a huge pile for tax season. The onus is on the filer to show receipts and invoices should CRA ever come calling. Not having your paperwork in order can cost you! We consider this time and money well spent to hire a bookkeeper to do this for you.

Look At Your Investments On An After Tax Basis

It’s great that you are investing in real estate and making money, but what do you really have to show for it come tax time? We often see people who know how much positive cash flow they have monthly or yearly, or what cap rate their property runs at, but hardly ever anyone who look at how their properties perform after taxes are accounted for. Tax season is a great time to review how your properties are actually performing. For example, say you have an investment property with a fixed rate mortgage at 3% and you’re in a marginal tax bracket of 40%. Because mortgage interest is tax deductible, your after tax interest cost is 1.8%. You have some extra cash and were thinking about making a prepayment on this mortgage. When you look at it in this after-tax light, you may consider there being a better use for the cash that can achieve a better rate of return after tax (highly likely in this case).

Give Thought to Tax Planning When Considering Real Estate Transactions

You might have a plan to dispose of a long held rental property in the near future.  The market might be hot right now and you’re thinking it’s a good time to sell. You also are a higher income earner but planning to retire in a few years and drop into a much lower tax bracket. All else being equal, it might make sense from a tax liability stand point to wait on that sale until you’ve retired to pay less tax on the proceeds of your sale. This type of planning is best done with your tax professional.

It’s Not All Bad

Sometimes we hear people complain about their tax bills around this time of year.  To all those high income earners: would you rather make less money? It's generally a good problem to pay a lot of taxes because it means your making a lot of income! Make the best of the situation by maximizing allowable deductions and efficient tax planning.

That’s a wrap for the tax season. How was tax season for you?

Thursday, April 21, 2016


Landlords will often consider offering a RENT FREE INCENTIVE in order to attract Tenants on vacancies they are looking to lease. An RFI can be offered in addition to a TI ALLOWANCE or in lieu of, depending on the specific deal. However, from a Landlord’s perspective there are certain considerations that you should clearly assess, as you look to build-in a rent free period into any lease deal.

Questions to Consider:

Q: How does the RFI affect your overall cashflow for the property?
A: Cashflow – 2 months not as much a factor, as say a 6 month RFI would be.

Q: How does the RFI affect the net effective rent over the lease term?
A: Net Effective Rent is reduced from the face rate as shown on the lease (do the math).

Q: Does it include the operating cost/ft. of the property or strictly the base rental?
A: If Operating Cost/Ft. forms part of the RFI, it costs the same as if the unit were vacant.

Q: Are the TI costs being invested by the Tenant comparable to the rent free amount?
A: Tenant Investment is an ideal trade-off and helps substantiate the RFI.

Q: Is the Tenant stable and do they offer a Good Covenant?
A: Tenant Stability is a key factor and one which requires a close look.

Q: Does the RFI have to be provided at the front of the lease term?
A: RFI Upfront – not necessarily, and helps reduce the risk if it’s spread out over the term.

Q: Can RFI be conditional upon the Tenant not defaulting and otherwise becoming repayable?
A: RFI Conditional – all terms are negotiable and this ties the RFI to tenant’s performance under the lease agreement.

As with TI allowances, rent free incentives are considered to be a cost of doing business, and when offered in the right circumstances can be an effective inducement. The above Q&A gives you a good basis for assessment and ensures any RFI concessions make good business sense. RFI expectations vary  from the Tenant’s perspective and is really a market call based on your area.

In any real estate deal – a lease in this case – remember you don’t get what you deserve, but what you negotiate. RFI terms are often a key point in any lease negotiation and hopefully this gives you a better perspective as you assess a future deal.

We welcome your comments and stories about RENT FREE INCENTIVES based on your experiences – both Landlord and Broker alike. Just a click/call away from discussing our investment opportunities here in Windsor-Essex!

Tuesday, April 19, 2016

Tax Time – Income & Expense Categories

As we approach the end of tax season, hopefully you haven’t procrastinated.  For you tax filers (early or late) with income property, today we are going to discuss income & expense categories to include when filing your return for an income property.

As a person with income properties, for each property, you will file a form called a “Statement of Real Estate Rentals”. On this form you are basically showing what your net taxable rental income is for that property, for the year.  To come up with this net income amount, you must provide your rental income for the year and subtract all related expenses. But what items should be included in these calculations?


  1. Rent – all rents for your property.
  2. Parking Income – any parking fees charged.
  3. Laundry Income – any laundry fees charged.
  4. Other Income – ie. solar panel income or other miscellaneous income.
Total these income items up and you come up with your Gross Rental Income.


  1. Advertising – any expenses related to advertising the property for rent.
  2. Insurance – any expenses related to insuring the property.
  3. Interest – any expense incurred by borrowing to acquire the rental income.  Most notably the mortgage interest.
  4. Office Expenses – ie. office supplies.
  5. Legal, Accounting & Professional Fees – any expenses related to hiring a professional in running the property, ie. bookkeeping.
  6. Management/Admin fees – ie. expenses related to hiring a property manager.
  7. Maintenance & Repairs – ie. fixing broken window, snow removal.
  8. Salaries, Wages & Benefits – any employees you pay to run your properties.
  9. Property Taxes – city property tax paid.
  10. Travel – any travel costs to acquire/sell/manage a property
  11. Utilities – any utility costs paid by the landlord.
  12. Motor Vehicle Expenses – you are allowed to deduct vehicle expenses directly related to driving for purposes of managing the property. This is a grey area and detailed records should be kept for proof.
  13. Other Expenses – any other expenses not mentioned above.
Total these expenses to come up with your Deductible Expense Total.

Taking your gross rental income minus your deductible expense total will give you a net income (loss) before adjustments. At this point you are able to deduct your CCA allowance (depreciation) to come up with your net income. This net income amount will be added to your other income sources for the year for tax purposes.

What has been your experience with the Statement of Real Estate Rentals Form?

Wednesday, April 13, 2016

Tax Time – Depreciation Explained Part 2

As we get further into tax season, our topics are getting more in-depth.  Last week we did an intro into depreciation expense for tax purposes. This week we are going to discuss considerations when dealing with depreciation on your property.

Depreciation in Year 1

In the year that you acquire a property, the depreciation rule is a little different.  No matter if you bought the property in January or December of that year, CRA allows a 50% or half-year rule for depreciation purposes. So if your CCA for the year is $10,000 for a full year, in the first year you’re only allowed to claim half that amount or $5,000.

Tax Effects from Depreciation when selling a Property

Selling the property may result in a “recapture” of your CCA. You would add this recaptured amount to your taxable income when preparing your tax return. Recapture may happen if upon selling the property, the proceeds from the sale exceed the remaining undepreciated capital cost. Your undepreciated capital cost is the capital cost of all your depreciable property in the class subtracted from the allowance you claimed in prior years. Alternatively, you might be allowed to take a “terminal loss” deduction from your income. Terminal loss is when you don’t have any depreciable property in the class at the end of the year, but you have an outstanding CCA amount that you have not claimed. When viewing depreciation in this light, it acts more as a tax deferral until sale.  For example, say you bought a property many years ago for $200,000, and over the years you depreciated it so that you had a book value (or undepreciated capital cost) of $100,000, and sold that property for net price of $250,000. $50,000 ($250,000-200,000) will be taxed as a capital gain (or 50% of the gain will be taxed), and $100,000 ($200,000-$100,000) will be the depreciation recapture (100% of this amount will be taxed). This is sometimes a confusing calculation and is best done in conjunction with an accounting professional.

When Rental Expenses Exceed Income

If your rental expenses exceed your gross rental income, you have incurred a loss. You may be able to deduct your rental loss from other sources of income, but you cannot use CCA to increase or produce a rental loss.  For an example, say you had a year with lots of repairs and maintenance or lots of vacancy and you only ended up with a net income of $2,000, but you have a CCA amount for the year of $5,000 that you can use as a depreciation expense, you wouldn’t be able to use the full $5,000 to create a $3,000 loss ($2,000-$5,000) to deduct from other sources.  You would only be able to use $2,000 in this case to decrease your net income to zero.

Overall, there are pros and cons to taking CCA. On the upside, the allowance lowers your taxable income, which ultimately reduces your tax liability. On the downside, when you sell the property all prior CCA claims are recaptured and treated as taxable income, which increases your tax liability.  This can be a benefit if used correctly as a tax planning tool but can also be used incorrectly with tax consequences. This type of tax planning should be discussed with a professional.

Have you had a discussion with your accountant regarding depreciation cost/benefit for your tax situation?

Tuesday, April 5, 2016

Tax Time – Depreciation Explained Part 1

Now that we are fully into tax season, we are going to dive deeper into a confusing tax subject: depreciation.  We touched on this subject briefly in our post from last week, but this topic deserves its own post. We frequently witness the impact of depreciation with our clients. Often, these impacts aren’t fully understood until tax time!

One of the benefits of owning rental properties is the claiming of expenses as deductions against rental income. This leads to a reduction in taxable income for that year. Typical expenses include property taxes, insurance, repairs and maintenance, mortgage interest, and more.

Another expense (unlike the above cash expense) is an accounting expense, the ability to claim depreciation. This expense in Canada is referred to as a Capital Cost Allowance (CCA). This capital cost allowance includes capital costs of a property including the purchase price, legal closing costs and renovations that can’t be expensed. For example, if you purchase a property for $300,000 and spend $5,000 on closing costs and $20,000 on renovations, you’ll have a value of $325,000 for CCA purposes.

There are different rates of CCA that you can claim, but in most cases the rate is 4%, which applies to most buildings that were obtained after 1987. The most used method for claiming CCA is the Declining Balance Method. In this case, your CCA amount is based on any allowance claimed in prior years, subtracted from the capital cost of the property. As you claim the CCA, in subsequent years your remaining balance declines. You can claim any amount of your allowance for the year—you do not have to the take the full amount all at once. For example, you might want to hold off on claiming your CCA if you don’t owe any taxes for the year, since taking the allowance lowers the amount you’re entitled to in upcoming years.

To better illustrate the declining balance method, imagine you have a property with a CCA value of $300,000 and the 4% rate is applied to your property. You can claim $300,000 x 4% = $12,000 of depreciation expense in that tax year.  The next year your new CCA balance would be $300,000-$12,000= $288,000. This new value would be applicable to the depreciation expense for the next year.

Next week we are going to discuss other considerations involving depreciation or CCA. 

Do you take depreciation expense on your rental properties?

TENANT IMPROVEMENT (TI) ALLOWANCE - ‘An Effective Marketing Strategy’

Successful landlords will often offer TI allowances in order to attract tenants on vacancies that they are looking to fill. Commercial premises generally require some level of customization to suit a new user considering the space. This may include floor plan changes and general upgrades, including baths, staff rooms, floor and wall finishes, ceilings, lighting, and more. The intent in many cases may be to build and finish the unit, so that the property is turn-key for tenant use.

TI allowances are generally quoted on a $/ft. basis. For example, if you are marketing a 1000-ft space and offer $15/ft as a TI allowance, you are offering an incentive of $15,000 to the prospective tenant. From the landlord’s perspective, if this results in a 5 year lease deal, you are in effect investing $3000 per year ($15,000 divided by 5) in order to secure the tenant in your property.

Questions to consider:

Q: Is it the difference maker in securing the tenant?
A: Yes, it often is and is based on the competitiveness of the market.

Q: Is the tenant stable and do they offer a good covenant?
A: Investments with stable tenants are always a good idea.

Q: When do you pay the TI allowance?
A: After the lease is executed and the work is complete.

Q: Can it be given as a straight cash incentive?
A: Yes, often where the improvement costs exceed the TI allowance.

Q: Can the tenant do the required work, if the landlord offers a TI incentive?
A: Yes, often where the build-out is a standardized plan.

Q: Can a higher net rental be expected by doing a TI allowance?
A: Possibly, but is based on the competitiveness of your market.

For the most part, landlords dealing with national tenants will find TI allowances to be an upfront expectation and should be viewed as a cost of doing business. Ultimately, whether or not it is good business or not will be determined by the size of the allowance and the details of the lease proposal. This is a market call based on the competitiveness of your area.

We welcome your comments and stories about TI allowances based on your experiences, both landlords and brokers alike. We are a click or call away from discussing our investment opportunities here in Windsor-Essex County!