How is Rental Income Taxed?

As a realtor, you are exposed to a lot of properties every day. You have many opportunities to evaluate investment properties, and may even already own a few. You know the market and areas where rental income is in demand. Now what about the tax implications?

That’s a bit trickier and it depends…

If you have purchased a rental property in your personal name, the income, less allowable deductions, will be included on your personal income tax return and added to your taxable income. From here, you will be taxed based on your graduated tax rates. The highest tax bracket has a tax rate of 53.53%.

If you have purchased the rental property through a corporation, either your PREC or a holding company, then there are also a couple of factors to consider. If your rental does not qualify as active income, then in Ontario your corporation will be taxed at 46.17%. Still high, but possibly better than your personal rate. In some cases we can reduce this with proper tax planning and avoid double taxation.  

Alternatively, if your property qualifies as active business income (which is quite specific for rentals) your corporation will pay as high as 26.5% and as low as 12.2% tax. This is dependent on your total active business income.  

As you can see, there is not a one-size-fits-all answer in this regard. There are advantages and disadvantages to each option, and how you own real estate has implications. Discussing your optimal structure with your accountant is a must!