16 – OVERVIEW OF OTHER MORE ADVANCES ISSUES

Other Advanced Issues You Should Be Aware Of in Rental Property Taxation
GST/HST Implications for Rental Properties in Canada (Beginner’s Guide)

Other Advanced Issues You Should Be Aware Of in Rental Property Taxation

Once you understand the basics of reporting rental income, claiming expenses, and applying Capital Cost Allowance (CCA), it’s important to know that rental property taxation can get much more complex in real-life situations.

As a future tax preparer, you’ll eventually encounter clients whose circumstances involve special rules, historical tax changes, or exceptions that affect how you calculate their income and capital gains.

This section provides an overview of advanced issues that you may not deal with every day — but should at least be aware of when working with clients who have owned properties for many years.

1. Properties Owned Before 1972

Before 1972, Canada did not have a capital gains tax.

This means that if a client bought a cottage or rental property before 1972 and is selling it today, any increase in value up to December 31, 1971 is completely tax-free.

For example:
If a property was purchased in 1955 for $20,000 and was worth $60,000 in 1972, only the gain after 1972 is taxable when it’s sold.

However, you’ll need to determine the fair market value (FMV) as of 1972 — something that may require research, appraisals, or old documentation. This value becomes the new adjusted cost base (ACB) for tax purposes.

2. The $100,000 Lifetime Capital Gains Exemption (Eliminated in 1994)

Between 1985 and 1994, Canadians could claim up to $100,000 in capital gains tax-free under a one-time exemption.

Although this exemption was eliminated in 1994, taxpayers at the time were allowed to “bump up” the cost base of certain assets, such as real estate or investments, to take advantage of it before it disappeared.

For example:
If someone purchased a property in 1980 for $100,000 and it was worth $300,000 in 1994, they could have increased their ACB by up to $100,000. This would reduce future capital gains when the property is sold.

Why this matters today:
If your client owns a property acquired before 1994, check whether they made this election to bump up their cost base. If they did, you’ll need to use the adjusted ACB when calculating capital gains — otherwise, they may end up paying tax twice on the same portion of value.

3. Change in Use of Property (Personal ↔ Rental)

One of the most common advanced issues in tax preparation is when a property’s use changes — for example:

A client converts their principal residence into a rental property, or
A client converts their rental property into a principal residence.

This “change in use” triggers special capital gains rules under the Income Tax Act.

When a change occurs, the CRA considers the property to have been deemed disposed of at fair market value, and then immediately reacquired at that same value. This can result in a capital gain or loss, even though the property hasn’t actually been sold.

There are elections available to defer this gain in some situations, but this area requires careful analysis — since it also affects the principal residence exemption (PRE) calculation.

4. Principal Residence Exemption (PRE) Complications

The principal residence exemption allows taxpayers to sell their home tax-free, but there are strict limits:

A family unit (spouses and minor children) can only claim one principal residence per year.
If a family owns multiple properties (e.g., a house in the city and a cottage), they must choose which property to designate for each year when calculating capital gains.

Some older rules make this even more complex. For example:

Before the mid-1980s, spouses were allowed separate exemptions, meaning one could claim a city home while the other claimed a vacation property.
Today, that’s no longer allowed — only one exemption per family is permitted.

In rare cases, this old rule may still affect properties that were acquired and held since that time, so historical context matters.

5. Deductions for Undeveloped or Unavailable Properties

If a client owns land or a building that is not yet available for rent, special rules apply.

For example:

Interest expenses and property taxes on undeveloped land may be limited or deferred until the property produces income.
A property that’s being renovated or under construction cannot claim normal rental expenses until it’s available for rent.

These rules are designed to prevent taxpayers from deducting losses from properties that are not yet generating income.

6. Transitional and Historical Rules — Why They Still Matter

You’ll notice that many of these issues stem from old tax provisions — some dating back decades.

However, they can still affect today’s returns when clients sell long-held properties or inherit family real estate. Understanding these historical rules helps ensure:

You calculate the correct adjusted cost base (ACB),
You apply exemptions properly, and
You avoid over-reporting taxable gains.

7. Key Takeaway for New Tax Preparers

When working with rental or personal-use properties, it’s important to remember that not all situations fit neatly into basic rules.

Before finalizing a tax return, always consider:

When the property was purchased.
Whether any special elections or exemptions applied in the past.
Whether the use of the property has changed.
If the principal residence exemption is being used correctly.

If something doesn’t seem straightforward, it’s worth consulting a senior tax preparer, a CRA interpretation bulletin, or a tax specialist before proceeding.

Understanding these advanced issues — even at a basic level — will help you stand out as a knowledgeable and careful tax preparer.

GST/HST Implications for Rental Properties in Canada (Beginner’s Guide)

When preparing Canadian income tax returns, most people think only about income tax on the T1 return. However, another major tax can also apply to certain types of income — the Goods and Services Tax (GST) or Harmonized Sales Tax (HST).

If you plan to help clients who earn rental or business income, you’ll eventually come across situations where GST/HST registration and reporting are required. This section explains — in beginner-friendly terms — when rental properties are subject to GST/HST, how the reporting process works, and what rules you need to know to avoid mistakes.

🧾 What Is GST/HST?

The Goods and Services Tax (GST) is a federal tax applied to most goods and services sold in Canada. In certain provinces (like Ontario, New Brunswick, Nova Scotia, Newfoundland and Labrador, and Prince Edward Island), the GST is combined with the provincial sales tax to form the Harmonized Sales Tax (HST).

Each province has its own HST rate. For example:

Ontario → 13%
Nova Scotia → 15%
Alberta → 5% (GST only, no HST)

For most individuals, GST/HST doesn’t come into play during personal income tax filing. But for rental and business income, certain activities may require registration, collection, and remittance of this tax.

🏢 When Does GST/HST Apply to Rental Properties?

The key rule:
Residential properties are exempt from GST/HST, but non-residential (commercial) properties are taxable.

Let’s break that down.

1. Residential Properties – Exempt from GST/HST

If a landlord is renting out residential units — for example, an apartment, a condo, or a house — the rent is considered an “exempt supply” under GST/HST rules.
That means:

The landlord does not charge GST/HST on the rent.
The landlord cannot claim Input Tax Credits (ITCs) on any GST/HST they pay on expenses such as repairs, utilities, or maintenance.

Even if a residential landlord earns high rental income, they don’t need to register for GST/HST.

2. Commercial or Industrial Properties – Taxable under GST/HST

If the property is used for commercial or industrial purposes, such as:

A retail store,
An office space,
A warehouse or factory,
then GST/HST rules do apply.

In these cases:

The landlord must register for GST/HST once annual rental revenues exceed $30,000 (this is called the small supplier threshold).
They must charge GST/HST on the rent to the tenant.
They must remit the tax collected to the government (usually annually, though some may file quarterly).
They can claim ITCs on the GST/HST they paid on property-related expenses.

📊 Example: How GST/HST Works for a Commercial Property

Let’s imagine a landlord in Ontario rents out a commercial unit for $100,000 per year.

Rent charged: $100,000
HST (13%): $13,000
Total rent collected from tenant: $113,000

The landlord must report this on a GST/HST return and remit the $13,000 to the CRA.

However, the landlord may have paid HST on expenses during the year — for example:

Repairs and maintenance: $6,000 + $780 HST
Utilities: $2,000 + $260 HST
Insurance: $2,000 + $260 HST
→ Total HST paid on expenses: $1,300

The landlord can claim $1,300 in Input Tax Credits (ITCs), which reduces the amount they owe.

So, the net amount to remit would be:
$13,000 (HST collected) – $1,300 (ITCs) = $11,700 payable to CRA

🧮 Filing the GST/HST Return

GST/HST reporting is separate from the T1 income tax return.
If a taxpayer has GST/HST obligations, they must file a GST/HST return (Form GST34) — even if you already file their personal or business taxes.

Filing frequency depends on income:

Annual – for most small landlords or sole proprietors.
Quarterly or monthly – for larger operations or when CRA requires it.

Due dates:

Return filing due date: June 15 (same as for self-employed individuals)
Payment due date: April 30 (same as personal tax payment)

🏠 Mixed-Use Properties (Residential + Commercial)

Sometimes a property contains both residential and commercial units — for example, a building with a store on the main floor and apartments above.

Here’s how GST/HST applies:

The commercial portion is taxable — GST/HST must be charged on that rent.
The residential portion remains exempt — no GST/HST is charged, even though the landlord is registered.

Registration for GST/HST is required if the commercial portion alone earns more than $30,000 per year.
However, GST/HST applies only to that commercial section’s rent — not to the residential units.

💡 Key Takeaways for New Tax Preparers

Residential rent = Exempt → No GST/HST charged, no ITCs claimed.
Commercial rent = Taxable → Charge, collect, and remit GST/HST.
Threshold: Register once taxable revenues exceed $30,000/year.
Separate reporting: File a GST/HST return in addition to the T1 return.
Input Tax Credits: Claim back GST/HST paid on related expenses.
Mixed-use properties: Apply GST/HST only to the commercial portion.

📘 Next Step for Deeper Learning

If you plan to specialize in tax preparation or business filings, consider learning more about GST/HST in detail. A course like “GST/HST Fundamentals” (offered by Canadian Tax Academy or similar providers) can help you understand how to:

Register a client for GST/HST,
File returns accurately,
Handle ITCs and adjustments, and
Manage compliance for more complex situations (like property sales or business transfers).