When you acquire a rental property you have to consider the tax implications because it will impact the bottom line. Each type of tax structure will have advantages and drawbacks.
The real estate market in Toronto and the suburbs has been booming over the last several years because of the favorable economic conditions and the low interest rates. Individuals have invested in rental properties of all sorts. Rental income is generated when you rent a property you own. Rental income could be generated from a house, apartment, or a commercial building. The rental property may be acquired in your personal name, in a partnership, in a trust or a corporation. Depending on who owns the property, the tax consequences are very different.
If the rental property is owned in your personal name, this income is taxed on your T1 personal income tax return. The tax you pay will depend on your marginal tax rate.
The partnership’s rental income is attributed to the partners, who must include their respective share of it in their personal income.
If a rental property is held in a corporation there are multiple factors that have to be considered in determining the tax rate. The General Corporate Rate is 38% Federal and 11.50% Provincial (Ontario). Therefore we have a combined General Corporate Rate of 49.50%. However, not all corporations pay this rate because there are tax breaks offered by the federal and provincial governments. The federal government offers a 10% abatement which brings the tax rate down by 10% to 28%. We also have the Small Business Deduction of 17% and the General rate reduction of 13%. To receive preferred tax rates, the corporation has to meet certain conditions.
| Small-business tax rate | General corporate tax rate | Investment Income tax rate | |
| General Corporate Tax Rate | 38.00% | 38.00% | 38.00% |
| Federal abatement | -10.00% | -10.00% | -10.00% |
| 28.00% | 28.00% | 28.00% | |
| Small-business deduction | -17.00% | 0.00% | 0.00% |
| General tax rate reduction | 0.00% | -13.00% | 0.00% |
| Additional tax on investment Income | 0.00% | 0.00% | 6.67% |
| Federal Tax Rate | 11.00% | 15.00% | 34.67% |
| Provincial Tax Rate (Ontario) | 4.50% | 11.50% | 11.50% |
| Total Tax Rate | 15.50% | 26.50% | 46.17% |
- Small Business Deduction
The Small Business Deduction (SBD) is available to Canadian Control Private Corporations (CCPC) on Active Business Income (ABI). In Ontario the SBD is 17% and is applicable on the first $500,000 of rental income. Income greater than $500,000 would not qualify for the SBD but would qualify for the General Rate Reduction (GRR). To qualify for the Small Business Deduction of 17% the rental income has to be Active Business Income (defined below). - Active Business Income
Active Business includes any business carried on by a corporation other than a Specified Investment Business or a Personal Services Business. A Specified Investment Business is a business which drives income from property including rental income. A Personal Services Business is a business that provides services through a corporation (if the corporation did not exist the individual providing services would be considered an employee). However, if the corporation employs more than five full time employees the income is not considered to be from a Specified Investment Business or a Personal Service Business and is considered Active Business Income.
Rental income generated by a CCPC falls into three different tax categories. If the rental income is Active Business Income and qualifies for the Small Business Deduction it will be taxed at 15.50%. If the income is Active Business Income but does not qualify for the Small Business Deduction it will be taxed at 26.50%. If the income is not Active Business Income (therefore does not qualify for the Small Business Deduction) it will be taxed at 46.17%. It is important to remember that this rate can be reduced to 22 percent where dividends are paid to the shareholders. This is done to avoid double taxation and because of the favorable tax treatment on dividends.