As tax season has come to an end I often think about the biggest surprises that my clients receive when preparing their personal income tax returns. Many people earn rental revenue but they are sometimes confused by how their taxable income is calculated. The biggest concern is in the difference between an expense and an asset. If you replace one window, it is likely an expense and will reduce your income dollar for dollar. If you replace all of the windows in your building this would probably be considered to be a capital item. This means that you add it to the cost of your property and depreciate it at 4% a year, which is pretty much zero! There is plenty of grey area in between these clear cut examples.
Many taxpayers believe that when they spend money they get a deduction, but that is not always the case. We understand that when we buy a car or a computer we write that off over time, but it is not as clear when we are spending money on rental property.
Principal Residence: New Tax Reporting Guidelines for Canadians
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