Tax Implications of Rental Properties

The real estate market in Toronto and the suburbs has been growing due to favorable economic conditions and low interest rates. Many individuals have invested in rental properties, generating income from houses, apartments, or commercial buildings. Rental properties can be owned personally, in a partnership, in a trust, or through a corporation, each with different tax consequences.

Rental Property Owned Personally

If a rental property is owned in your personal name, the income is reported on your T1 personal income tax return. The tax paid depends on your marginal tax rate.

Rental Property in a Partnership

In a partnership, rental income is attributed to partners based on their ownership share. Each partner must include their share of the income in their personal tax return.

Rental Property in a Corporation

When a rental property is held in a corporation, multiple factors influence the tax rate. The General Corporate Rate is 38% federally and 11.50% provincially in Ontario, totaling 49.50%. However, tax breaks reduce this rate, including a 10% federal abatement, a 19% Small Business Deduction (SBD), and a 13% General Rate Reduction (GRR), provided certain conditions are met.

Corporate Tax Structure for Rental Properties

Small Business Deduction (SBD)

The Small Business Deduction is available to Canadian-Controlled Private Corporations (CCPCs) on Active Business Income (ABI). In Ontario, the SBD is 19% and applies to the first $500,000 of rental income. Income exceeding this amount qualifies for the General Rate Reduction instead.

Active Business Income (ABI)

Active Business Income includes business activities carried out by a corporation, excluding Specified Investment Businesses and Personal Services Businesses. Rental income is typically considered passive; however, if the corporation employs more than five full-time employees, it may be considered Active Business Income.

Taxation of Rental Income in a CCPC

Rental income in a CCPC falls into three tax categories:

• Active Business Income qualifying for SBD – Taxed at 15.50%.
• Active Business Income not qualifying for SBD – Taxed at 26.50%.
• Non-Active Business Income – Taxed at 46.17%, which can be reduced to 22% if dividends are distributed to shareholders, preventing double taxation and benefiting from favorable dividend tax treatment.