Personal tax accountant in Langley

Repair or improvement: the line that decides this year's tax

Every dollar spent on a rental property is either a current expense deducted against this year's rent or a capital addition recovered slowly over the life of the property. Replacing a broken window with a comparable one is generally maintenance. Replacing every window in the building with better ones is generally an improvement. The tests that matter are whether the work restored the property to its previous condition or made it materially better, whether it replaced a separate asset or a part of one, and whether the value added is enduring. The temptation is to treat everything as a repair, which produces a good result for a few years and a poor one on assessment. The current versus capital expenses guide works through the boundary.

Claiming depreciation is a loan against the sale

An owner can generally claim capital cost allowance on a rental building, which reduces rental income now. What it also does is reduce the building's remaining cost for tax purposes, so that when the property is eventually sold, the depreciation previously claimed is generally brought back into income in that year. In a market where property values have risen, that recapture arrives in the same year as a capital gain, in a year when income is already high. Claiming depreciation is therefore a deferral, not a saving, and it is a deferral into what is usually the worst possible year to receive income. It also cannot create or increase a rental loss.

Why the corporation is usually the wrong place to hold it

Owners who already have a corporation often assume the rental should sit inside it. Rental income earned by a corporation that does not employ a substantial number of people is generally treated as passive investment income, taxed at a materially higher corporate rate than active business income, with part of it refundable only when dividends are paid out. On top of that, passive investment income earned in a corporation can reduce access to the preferential small business rate on the operating company's active income. And moving an appreciated property into a corporation is itself a disposition unless it is structured carefully. See investment income in a corporation.

Co-ownership, and reporting it consistently

Where a property is held by two people, the rental income and expenses are generally reported in proportion to the beneficial ownership interest — that is, who actually put in the money and who bears the risk — rather than in whatever proportion is convenient in a given year. Splitting fifty-fifty on the title but reporting all the income on the lower earner's return is the kind of inconsistency that is easy to spot and hard to defend. Deciding the ownership proportion at purchase, documenting it, and reporting it the same way every year afterwards is the whole of the discipline required.

Interest, and what the borrowing was actually for

Interest is deductible where the borrowed money was used to earn income. That means the deductibility of a loan follows the use of the funds rather than the asset pledged as security. A line of credit secured against a rental property but spent on a personal vehicle does not produce deductible interest, and a loan secured against a home but used to buy the rental generally does. Keeping borrowings for income-earning purposes in separate accounts is what makes that traceable years later. See interest deductibility.

What is covered

One Chartered Professional Accountant handles the whole file:

• Rental statement preparation and expense classification
• Depreciation decision modelled against an eventual sale
• Ownership structure review before a property is bought or moved
• Co-ownership reporting and consistency between spouses
• Interest tracing and borrowing structure
• T1 preparation coordinated with the corporate return

Remote, and there is no Langley office

EverStone has one office, in Abbotsford, and no Langley location. Rental files run entirely online — video meetings, e-signature and secure document upload — which suits a document-heavy return where the real work is classifying invoices rather than sitting across a desk.