Taxes on personal, business and rental income By John Dickie, President, CFAA The federal government plans to reform the income tax payable by Canadian controlled private corporations (CCPCs). That was headline news from September to November 2017. The revised plans will likely be headline news in March and April, and the reforms may have a significant effect on many landlords. This article goes
behind the current dispute to explain the basics of how our income tax system works, for both individuals and corporations, with particular attention on the effects on rental owners and operators, and to the arguments that come up when people consider taxes on landlords, on rental property and on rental income.
income at all. Business people apply and combine resources, which cost money, and by doing that produce products or services, which other people buy.
As its name suggests, income tax is tax on income. It is not tax on gifts received or inheritances. For individuals, it is usually tax on their wages, salaries, commissions and bonuses. (There are grey areas like large Christmas bonuses, prizes won through work, and reduced rent for superintendents, but they do not change the principle.) Income tax is generally tax on net income. If a person makes jewelry or paintings and sells them, they do not pay tax on the full sales proceeds, which is their gross income. Instead they report their gross income, and also their expenses, such as the canvasses and paint, the material that goes into the jewelry, the rent on any studio space they use, and the cost of booths at shows where they sell their products. Tax is payable on their gross income after deducting their expenses, i.e. on their net income.
Landlords and other business people also report their gross income and their expenses, and pay tax on their net income. (Corporations also pay tax on their net income, which we will get to below.) In most cases, without spending the money on the expenses, there would be no net
For a unit that rents for $1,000 per month, a landlord may well pay the costs shown in Table 1, and end up with net income of only $100 per month. It is on their net income that a landlord or any other person or business pays income tax. Table 1 â€“ gross vs. net income Gross Income (Rent)
Expenses Mortgage Interest
Repairs & Landscaping
Insurance & misc.
Some people point to landlords or other business people and say they have an advantage because they can write off expenses. However, writing off legitimate expenses is just the process by which business people pay tax on net income rather than gross income.
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Homeowners do not write off their expenses because they pay no tax on the benefit they get from occupying their homes. In a few countries, homeowners have to report the value they receive in occupying their homes (usually the rent they would have to pay to rent them), and then they deduct their expenses such as the mortgage interest payment, property taxes and repairs. Non-profit social housing providers do not “write off” their expenses because they pay no tax on their net proceeds. In both cases, tax is not charged, which is why expenses do not reduce the tax payable (and there is no tax payable!) Progressive income tax Besides applying to net income rather than gross income, federal income tax is “progressive”, which means that a lower rate of tax is charged on lower incomes, and higher rates of tax are charged as incomes rise. In fact, through the personal tax credit system, no federal income tax is charged on an annual income below $11,650. The exact exemption level for provincial income tax varies by province, as do some of the tax brackets. In Quebec the province collects its own income tax, whereas in the rest of Canada, the federal government collects its own income tax AND the provincial income tax applicable to each person and most corporations. Table 2 shows the federal income brackets (for people under age 65, rounded to the nearest thousand dollars), and what tax rates applies to income in each bracket on average. Just as businesses can deduct their expenses from their income for tax purposes, individuals can deduct education expenses and significant medical expenses. Canadian income tax generally applies to each person individually, rather than to a couple or to a family unit.
Table 2: 2017 Income tax brackets and tax rates for individuals
Income Bracket (rounded)
Federal tax rate
Average provincial tax rate
Average total tax rate on income in that bracket
Up to $12,000
$12,001 to $58,000
$58,001 to $103,000
$103,001 to $154,000
$154,001 to $214,000
$214,001 and up
Notes: 1. A number of the provincial tax rates change at thresholds different from the federal thresholds. 2. The provincial tax rates tend to be higher in Atlantic Canada, Quebec and Ontario, and lower in the West.
Corporate income tax Corporations established to make money pay income tax based on their net income. There are currently three rates of tax, as shown in Table 3. Rental income is treated differently according to whether it is earned by a corporation with more than five full-time employees, or by a smaller corporation. For larger CCPCs or public companies, rental income is generally considered to be active business income. However, for corporations with fewer than six full-time employees, rental income is considered to be passive income, which attracts the current highest rate of corporate tax. Rental
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Table 3: 2017 Corporate income types and tax rates
The proposed federal tax reforms
Type of income and corporation
Federal tax rate
Average provincial tax rate
Average total tax rate
Active business income earned by a CCPC (of under $500,000 per year)
Active business income earned by a public corporation or a CCPC (over $500,000 per year)
Passive investment income (including much but not all rental income)
income is treated differently according to whether it is earned by a corporation with more than five full-time employees, or by a smaller corporation. For larger CCPCs or public companies, rental income is generally considered to be active business income. However, for corporations with fewer than six full-time employees, rental income is considered to be passive income, which attracts the current highest rate of corporate tax, namely an average of 51 per cent. Integration of corporate and personal income tax Another feature of the tax system is what is known as “integration”. Shareholders who receive income as dividends from corporations are given a tax credit to account for the fact that the corporation has already paid tax on that income. (The tax credits vary to account for the different tax rates which apply to different corporate income.) With a few minor and mostly transitory exceptions, the system works so that people pay the same amount of tax whether they receive business or rental income directly or through a corporation, and whatever tax rate the corporation paid.
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The government’s proposed reforms are meant to charge a new higher rate of tax (up to 73%) on the “second generation income” earned by CCPCs which received income that was taxed at the lowest rate. The rationale is that those corporations received a benefit, which they should only be able to keep if they invest the income in the active business. (For most owners, rental income is already taxed at about 51%, but some CCPCs will be made to pay up to 73%.) If instead of paying out its profits, a CCPC which makes a product invests its after-tax profit in shares of other companies or in rental real estate, the higher rate of tax is to apply in order to claw back the benefit of the lower rate of tax originally charged. That will: create an accounting nightmare interfere with efficient capital allocation • reduce investment in rental real estate, including rental housing. • •
Income from managing rental property for other owners qualifies as active business income, regardless of the size of the management company. Third party managers who invest part or all of their management income in rental property may find themselves paying a very high rate of tax on the income from those properties. According to the rationale for the new higher rate of tax, it should not apply to third generation income. As a result, the proposed reform will require many CCPCs to keep track of five different streams of net income, and whether that income has been paid out or reinvested (and in what).
Conclusion CFAA has met with key Finance policy people to seek to minimize the negative impact of the intended corporate tax reforms on rental owners and managers. In future issues, look for reports on the details of the proposed reforms as they affect rental income.
NATIONAL OUTLOOK Airbnb – the long view of short-term rentals in Canada By Jeremy Newman, Director of External Relations, CFAA Short-term rental services have massively disrupted how consumers and hosts approach short-term lodging, turning many would-be hotel guests into Airbnb guests and many homes into de facto hotel rooms. Short-term rentals are a growing issue for many of Canada’s landlords, as some tenants seek to earn a good part of their monthly rent through daily rentals of their apartments. A few tenants are in the business of renting well-located apartments short-term, for profit, while they live elsewhere. Airbnb is the biggest and most popular of the short-term rental services, which are popular among users for their ease of use and flexible and (sometimes) economical short-stay accommodations. Airbnb has seen staggering growth since it came on to the market in 2009, now boasting 200 million users and over 3 million listings in 191 countries. In Canada, it is estimated that there are 70,000 Airbnb hosts with over 105,000 listings. In Canada, Airbnb generates now generate over $500 million in revenue; which is more than double what it generated in 2015. Governments have been slow to understand the impacts, and effectively regulate short-term rentals. Bowing largely to considerable pressure from the hotel lobby which argues that Airbnb benefits from an uneven playing field, Airbnb has made several major concessions, including its agreement to collect local hospitality taxes from its hosts. Impacts felt by landlords and tenants alike But the impacts of short-term rental services extend far beyond the bottom-line of the hotel industry. At a market level, research has confirmed what those in the rental housing industry already knew: Airbnb removes units from the rental market, causing or exacerbating supply and affordability issues in supply-limited centres like Toronto and Vancouver. This in turn, pushes low-income tenants out of city cores as units are turning into “ghost hotels.” Data from Toronto and Montreal, as well as many major American centres, show that increased Airbnb
use has inflated the cost of rent, and also leads to increased house prices. On a practical level, Airbnb rentals present security issues and sometimes noise and damage issues at rental buildings. Most landlords would prefer not to have to deal with “home sharing” and consider it a form of illegal subletting, where provinces allow.
A worrying picture Data from 100 US cities shows that a 10% increase in Airbnb listings leads to a:
0.39% increase in rents, and 0.64% increase in home prices.
Data from Canada show that Airbnb listings remove a total of 13,700 units from rental markets in Montreal, Toronto and Vancouver annually. That is about a 2% loss of rental stock. There are 105,000 active listings of Airbnb units in Canada. This number doubled in Canada since 2015.
Thriving in a legal grey zone In the United States, disturbances by Airbnb guests at a high-end apartment complex in Los Angeles led American landlord AIMCO, a major publicly traded apartment REIT, to sue Airbnb, claiming that Airbnb facilitated tenants in violating their lease agreements through unauthorized sublets. The federal judge ruled against AIMCO, saying that Airbnb was insulated from AIMCO’s claim, and that tenants were ultimately responsible for the violation, citing American communications law. Airbnb says that all tenants must have the landlord’s permission to host. Airbnb’s Terms of Service require hosts to pledge that they “will not breach any agreements with third parties.” However, it is relatively common for landlords to find their units listed without permission. An Ottawa landlord recently emailed Airbnb after finding one of their units listed. The listing was removed, but soon re-appeared on the listing site. Airbnb sent the landlord an official email response advising the landlord of their rights. Their conversation and email showed a definite reluctance to be helpful.
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DEC/JAN 2017-18 An Ottawa landlord advocate says, “I am convinced Airbnb wants to encourage tenants engaged in the practice to continue because then Airbnb gets paid.” In response to questions about the issues at Airbnb short-term rentals, Airbnb pointed to its recently-launched “neighbour tool,” which allows people to contact Airbnb about problems with listings in their community. Airbnb says it works with the host to resolve the issue. Airbnb’s spokesperson added, “Hosting is a big responsibility and those who repeatedly fail to meet our standards and expectations will be subject to suspension or removal.” Responses across Canada Cities across Canada are moving to license Airbnb operators. Toronto’s Airbnb rules would use licensing to reduce “neighbourhood nuisances” from short-term rentals. The City could deny applications or remove problem operators from the city registry if there is criminal activity or a threat to public health and safety at a listing. Both Toronto and Vancouver want to limit Airbnb rentals to primary residences to keep people from buying housing stock to use as Airbnb income properties. Toronto city staff estimate that such a move would reduce the number of properties listed by 3,200 leaving 7,600 properties listed in Toronto. The City of Ottawa may follow suit. The City is currently examining whether existing bylaw and zoning rules can deal effectively with concerns about safety, parking, noise and land-use conflicts that come with the growing popularity of short-term rental operations. Licensing Airbnb operators (whether landlords or tenants) may make sense since the area is currently as unregulated as the “Wild West.” That is unlike rental housing, which is already heavily regulated by the provinces and the various building safety authorities, and does not need more regulation from the cities. However, landlords may only want Airbnb rentals to be regulated if landlord consent is required, since a regulated use without consent might interfere with landlords’ current ability to prevent Airbnb rentals as unlawful sublets. Even in provinces and municipalities that have regulated short-term rentals, host compliance and enforcement are major hurdles. For instance, Quebec has passed a provincial law requiring Airbnb hosts to register
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with the province. Few hosts have complied. Of the estimated 19,400 Airbnb hosts in Quebec, only 967 hosts are operating with a permit – that’s less than a 5% compliance rate. Divergent landlord views Most landlords want to stop short-term rentals by tenants in their buildings. However, a few are willing to allow tenants to rent short-term occasionally because they believe they can get higher rents if the tenants can get that help to pay the rent. In an effort to try to work with landlords and alleviate concerns, Airbnb has created the Airbnb Friendly Buildings Program to engage landlords in the hosting process. The program aims to better manage complaints and gives participating landlords a share of the hosting revenue. Support for, and uptake of the program is mixed. Critically, the program does nothing to alleviate the impact of Airbnb on prices and availability of housing in supply limited centres. A few other landlords are looking at hosting their units which may be vacant for 15 to 30 days between tenancies. While they would need to furnish the units to rent them on Airbnb, such rentals would be a way to generate extra revenue when they are not able to arrange back-to-back rentals. In the short and medium term, such operations could raise the net revenue and value of suitable rental buildings without reducing rental supply, and without increasing residential rents. In the long-term, such operations by landlords could raise the value of rental buildings, and thus encourage a larger supply of purpose-built rental buildings, which would be to the benefit of both tenants and property managers. The landlord community as a whole wants government to address the short-term rental issue in a way which addresses the concerns of landlords, tenants and homeowners in the long-term.
What do you think? Let CFAA know by email at email@example.com.
NATIONAL OUTLOOK Showcasing excellence in Canada‘s rental housing sector By Jeremy Newman, Director of External Relations, CFAA The Canadian Federation of Apartment Association successfully launched the first and only national rental housing awards in Canada in 2016. The program was well received. In its second year, applications in the CFAA Rental Housing Awards Program doubled. Now, CFAA is proud to announce that the 3rd annual Rental Housing Awards Program is open for applications. To learn how to apply, judge, or sponsor, please email firstname.lastname@example.org. Awards finalists and winners will be announced at the CFAA Awards Dinner on May 15, 2018. The Awards Dinner is part of the CFAA Rental Housing Conference 2018.
In 2017, Hollyburn properties won Rental Housing Development of the Year for their stunning “Bridgewater” development in North Vancouver. The building is the synthesis of Hollyburn’s four decades of property management experience. CFAA’s judges praised it for its modern, community oriented design and environmental practice. This year, attendees on the Building Innovations Tour will have a chance to see first-hand what made the Bridgewater stand out among the competition in 2017. The tour will also feature “The Duke” by Edgar Development, a 14-storey, 201 units mixed-use development in Mount Pleasant, Vancouver. With its LEED Gold certification, European inspired design, and public art installation, The Duke is also worthy of a national showcase. Visit www.CFAA-RHC.ca for more information about Rental Housing Conference 2018 in Vancouver.
Top: Hollyburn accepting Development of the Year award Middle: Bridgewater, North Vancouver Bottom: The Duke, Mount Pleasant, Vancouver
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Published on Feb 27, 2018