Do This to Legally Pay LESS TAXES in Canada

Summary

This video explains how rental property owners can use various tax strategies to reduce taxable income and save on taxes, focusing on the concept of Capital Cost Allowance (CCA) or depreciation. It highlights the potential tax benefits and risks of claiming depreciation on rental properties, including the impact on taxable income upon sale due to CCA recapture. The video also discusses how rental expenses, such as mortgage interest, repairs, and property taxes, can offset rental income. It emphasizes the importance of tax planning to make the most of these strategies while managing future tax liabilities.

Takeaways

• 😀 **Rental Income and Expenses**: You can offset rental income by various deductible expenses like operating costs, home insurance, property taxes, repairs, mortgage interest, and depreciation, reducing your taxable income.
• 😀 **Taxable Income Reduction**: In a scenario where you earn $30,000 in rental income and have $6,000 in expenses, plus $20,000 in mortgage interest, your taxable rental income can be reduced to just $4,000.
• 😀 **Depreciation (CCA)**: Depreciation on rental property and its contents can be claimed to reduce taxable income, but this comes with future tax implications when the property is sold.
• 😀 **CCA Recapture**: If the sale price exceeds the depreciated value of the property, a CCA recapture occurs, adding the difference back to your taxable income and potentially increasing your tax liability.
• 😀 **Tax Impact of Property Sale**: When selling a property for more than its depreciated value, the CCA recapture (e.g., $200,000 difference) is added to your taxable income, which can significantly impact your tax bill for that year.
• 😀 **Long-Term Strategy**: Claiming CCA might still be beneficial if you plan to hold the property long-term, as the tax savings from depreciation can be reinvested to generate higher returns before the recapture occurs.
• 😀 **Capital Gains and CCA**: If you sell the property and there’s depreciation claimed, the CCA recapture will be treated as regular income rather than capital gains, which can result in higher taxes.
• 😀 **Change of Use Election**: If you decide to move back into your rental property, the CRA treats it as a 'change of use,' and capital gains tax could apply on the appreciation even though you haven’t sold it yet.
• 😀 **Limitations of Change of Use Election**: If you’ve claimed CCA on your rental property, you cannot use the change of use election, which could allow you to avoid capital gains tax on the appreciation before selling the property.
• 😀 **Proper Tax Planning**: When deciding whether to claim CCA, it’s important to carefully plan ahead, considering factors such as how long you plan to hold the property, your future tax liabilities, and your investment strategy.
• 😀 **Avoiding Basic Mistakes**: Advanced tax strategies like CCA won’t be effective if you’re not getting your financial fundamentals right, making it crucial to ensure solid basic financial management first.

Q & A

What are the main rental expenses that can be used to offset rental income?

The main rental expenses that can be used to offset rental income include operating expenses, home insurance, property taxes, repairs, mortgage interest, and even depreciation of the property and its contents.

How can rental expenses help reduce the tax burden on rental income?

Rental expenses reduce the taxable rental income by deducting costs such as repairs, property taxes, and mortgage interest. This reduces the amount of rental income that is subject to tax, potentially lowering the overall tax burden.

How does mortgage interest affect rental income taxation?

Mortgage interest can be deducted from rental income to reduce taxable income. However, it's important to separate the interest from the principal portion of the mortgage payment, as only the interest is deductible.

What is depreciation (CCA), and how does it impact taxes for rental properties?

Depreciation, referred to as Capital Cost Allowance (CCA) in Canada, allows property owners to deduct the depreciation value of their rental property and its contents over time. This reduces taxable income, providing tax savings, but may lead to a recapture of those savings when the property is sold.

What is the potential issue with claiming depreciation on a rental property?

The issue with claiming depreciation is that it can lead to a 'recapture' of depreciation when the property is sold. If the property is sold for more than its undepreciated capital cost (UCC), the difference is added to taxable income as regular income, not capital gains.

Can you give an example of how CCA recapture works when selling a property?

For example, if you purchased a property for $600,000, claimed $100,000 in depreciation, and sold it for $700,000, the undepreciated capital cost (UCC) would be $500,000. The $200,000 difference between the sale price and UCC would be considered CCA recapture, added to your taxable income as regular income.

Why do some people still choose to claim CCA despite the potential for recapture?

People choose to claim CCA because it provides tax savings over the years, which can be reinvested for potentially higher returns. This can be especially beneficial if the property is held for a long time before being sold, allowing the owner to benefit from the savings before the recapture occurs.

What is the 'change of use election' and how does it relate to claiming CCA?

The 'change of use election' allows property owners to avoid capital gains tax when they move back into a rental property. However, if CCA has been claimed on the property, it disqualifies the owner from making this election, meaning they would be liable for capital gains tax on any appreciation in the property’s value.

What should property owners consider before deciding to claim CCA on their rental property?

Property owners should consider how long they plan to hold the property, their risk tolerance, expected investment returns, and how claiming CCA may impact their tax situation when selling the property or moving back in. Proper planning is crucial to avoid unexpected tax consequences.

What is the long-term impact of claiming CCA if the property is sold after several years?

The long-term impact of claiming CCA is that while it provides tax savings over the years, it may result in significant tax liabilities at the time of sale due to the CCA recapture. If the property is sold for more than its depreciated value, the difference is added to taxable income, which could result in a higher tax burden in the year of sale.