Page 20 - INSIGHT MAGAZINE_October 2024

ADVERTORIAL
Investment/Rental property – to tax or not to tax??

Lucci Racolta is a Chartered Professional Accountant, Licensed Public Accountant and
partner with Racolta Jensen LLP. He draws on his experience to deliver public accounting
services in assurance, accounting and taxation to small to medium sized businesses and
non-profits, with a focus on excellent client service.

When you purchase an investment property, there are many Assume you buy a rental property for $500,000 this year and over
expenses that you can take advantage of and claim. Whether the the next 5 years, you take depreciation of roughly $84,000 (see
property is purchased in your own personal name, a partnership table below).
or in a holding corporation, you can deduct expenses every year
such as insurance, telephone and utilities, property taxes, repairs/
maintenance and interest on the mortgage/loan, just to name a
few.
But one of the “expenses” that you are entitled to claim every
year is called depreciation. The key word here is “entitled”.
It’s not mandatory. Keep in mind there are some limits to how In year 6, you decide to sell the property and let’s assume it is
much you can claim (ie. 4% of the cost of the property or the now worth $800,000. This means you will need to add $84,000
undepreciated value every year) and also some rules around the to income in year 6 (as “recapture”) and pay taxes on this. In
maximum depreciation expense such as you can’t create a rental addition, you will have to claim capital gains of $300,000 (for
loss by claiming depreciation and you can’t increase a rental loss simplicity, disregard selling costs such as commission and legal).
for the year either. If the property is owned personally, the first $250,000 of capital
Regardless, the rule of thumb until now has been to claim gains (per individual) will be taxed using the “old” capital gain
depreciation and take advantage of it on your taxes as this rates as 50% inclusion in income. The additional $50,000 will
decreases your net rental income for the year and in theory you be taxed using the “new” capital gain rates as 67% inclusion in
pay less tax. Keep in mind however that less tax now means income.
more taxes in the future (when you sell the property), but we’ll If the property is owned by a holding corporation, the full
get to that shortly. $300,000 will be taxed using the “new” capital gain rates as 67%
With the change in capital gains that was introduced in June 2024, inclusion in income.
that may complicate things, or at least it makes depreciation not Due to the changes in tax rates on the capital gains, this will entail
be such a “sure” thing. Let’s look at some reasons why that may more taxes in the future (when you sell the property). As such,
be. it is no longer considered a certainty to take deprecation expense
By claiming depreciation each year on the property, you get your while you own the property, since your taxes on the capital gains
tax savings now. However, when you sell the property (in the (when you sell the property) will have increased, which means
future), all depreciation taken since you owned the property gets potentially considerably more taxes when you sell the property
added back as income in the year you sell the property. This may (especially if it pushes you into a higher tax bracket).
not seem like such a bad thing since you are getting your tax There is no “one shoe fits all” scenario so it is important to discuss
savings now, but will owe more in the future when you sell it (and these changes and have these tax planning discussions with your
this may be at a higher tax rate in the future, depending on your accountant, to ensure you make the right decision for you and
tax bracket). The kicker here is with the new increase in capital your family.
gain rates (since June 2024), this may work as a disadvantage to
you if you claim depreciation now. Let’s look at an example.

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