Rental Holding Corporation Books: T2, GIFI 8141 and CCA

What does a rental-only corporation file each year, and when?

Every resident corporation files a T2 for every tax year, including an inactive corporation and one with no tax payable (CRA: who files). The return is due six months after the tax year ends (CRA: when to file).

Any tax owing is due two months after year-end. The three months date applies only to a Canadian-controlled private corporation (CCPC) throughout the year that claimed the small business deduction in the current or previous year and meets a taxable-income test against its business limit (CRA: balance-due day). A business whose principal purpose is income from property, such as rent, is a "specified investment business", not an active business (Income Tax Act, section 125). A rental-only corporation therefore usually has no small business deduction to claim, so the earlier date applies. How rent is taxed inside a corporation, the exceptions, and what is refundable: rental property in a corporation.

During the year the corporation also pays monthly instalments, unless its tax for the year, or its first instalment base (generally last year's tax), is $3,000 or less. Quarterly instalments need a small business deduction, so a rental-only corporation usually pays monthly (Income Tax Act, section 157).

The return carries the corporation's financial statements in GIFI codes (the General Index of Financial Information, the CRA's standard list of codes for statement lines): Schedule 100 (balance sheet), Schedule 125 (income statement) and Schedule 141 (additional information). A first return after incorporation also carries Schedule 101, the opening balance sheet, and Schedule 24 (CRA: GIFI guide; CRA T2 guide, chapter 1). Two more points:

• The CRA administers provincial corporation tax everywhere except Quebec and Alberta (CRA). A corporation with a permanent establishment in Alberta also files an Alberta return, due six months after year-end (Alberta). Quebec corporation tax is also outside the CRA's administration; a corporation with a permanent establishment in Quebec should ask its preparer about the Revenu Québec return, which this page does not cover.
• Other filings, when they apply. A GST/HST return if the corporation is registered (see below), and the slip and filing that come with paying a dividend: declaring and paying a dividend.

The case is not simple if any of these is true:

• It is the corporation's first T2, or the properties were bought but the land and building were never booked.
• Years of T2 returns are unfiled, or the CRA has demanded a return. The late-filing penalty is 5% of the tax unpaid at the deadline plus 1% for each complete month late, up to 12 months. It is 10% plus 2% a month, up to 20 months, when the CRA demanded the return and had assessed a failure-to-file penalty in any of the three previous tax years (CRA T2 guide). A private corporation that files more than 3 years after year-end also loses that year's dividend refund, the refund of part of its tax when it pays taxable dividends (Income Tax Act, subsection 129(1)).
• Corporate and personal money run through the same account.
• You expect CCA to put the corporation into a loss. That depends on whether renting is its principal business, a question of fact.
• The owner or a relative lives in one of the units, or a building mixes homes and shops.
• The corporation rents to a company you also own or run.
• A shareholder lives outside Canada.

Gather the purchase and closing statements, mortgage statements, leases, tenant deposit records, property tax bills and a year of bank statements before anyone touches the books.

What books does a corporation that only holds rentals need?

The corporation must keep records and books of account that let its tax be determined (Income Tax Act, section 230). In practice that is a bank account in the corporation's name, double-entry books, and a way to see each property on its own, because each building is tracked for CCA and usually carries its own mortgage. For the account list behind every T2, see the chart of accounts for GIFI.

Codes are from the CRA GIFI guide. Record a tenant deposit as a liability (GIFI 2961) while the corporation holds it. It becomes revenue when it is applied to rent or the tenant forfeits it. Owner money has its own account: see the shareholder loan account. Whether rent is booked when earned or when received is covered in cash or accrual accounting.

Where does rent go on the T2 compared with the T776?

A corporation reports rent as revenue on Schedule 125 under GIFI 8141, Real estate rental revenue, which covers amounts received from renting apartments, commercial buildings, land and office space (CRA GIFI guide). A corporation has no T776.

Schedule 1 reconciles the net income in the financial statements to net income for tax (CRA: Schedule 1). That is why the books must be complete statements, not a list of rent and bills. For a rental held in a person's name, see rental statement expense lines.

How do I record the purchase: land, building, closing costs and the mortgage?

Split the price between land and building by fair market value, add the closing costs to each, and book the mortgage as a debt. Land is not depreciable property (CRA Folio S3-F4-C1), so the split decides how much cost can ever earn CCA.

1. Split the lump-sum price. The split must be reasonable on the facts and have regard to the fair market value of the land and of the building. The CRA can reallocate a split it finds unreasonable (same Folio, paragraphs 1.81 and 1.82). Keep the support, such as an appraisal or the municipal assessment notice.
2. Add the closing costs. Legal fees to buy the property and land transfer tax are not deducted against rent. They are added to the cost of the property, the legal fees divided between land and building in proportion (CRA rental guide; Income Tax Act, paragraph 18(1)(b)). That guide is written for T776 filers; the same capital-outlay rule applies to a corporation.
3. Book the mortgage. Principal repayments are not deductible. Interest is, at GIFI 8713. Fees to arrange the loan, such as broker, appraisal, processing and mortgage legal fees, are deducted over several years at 20% a year, not all at once (Income Tax Act, paragraph 20(1)(e)).
4. Book the owner's money. If the owner funded part of the price, record it as share capital or as a shareholder loan, and decide which before the money moves. Keep the account from running the other way: a balance the owner owes the corporation has its own tax rules (Income Tax Act, subsection 15(2)).

GST/HST paid on a purchase is covered in the two sales-tax guides below. Moving a property the owner already holds personally is a separate transaction: see moving rentals into a corporation.

How does capital cost allowance work on Schedule 8?

Capital cost allowance (CCA) is the tax version of depreciation. Schedule 8 calculates CCA, recapture of CCA and terminal losses (CRA: Schedule 8). A corporation claims it on depreciable property such as the building, never on the land. Rates are a percentage of the undepreciated capital cost (UCC), the class's running balance of additions less claims. Most buildings fall in Class 1; some earn a higher total rate:

• One class per building. A rental property that cost $50,000 or more gets its own class, so each building keeps its own UCC (Regulations, section 1101).
• Optional. The corporation may deduct any amount up to the maximum. Unclaimed CCA is not carried forward, but it stays in the UCC (CRA Folio S3-F4-C1).
• Timing. CCA cannot start until the property is available for use. A half-year rule normally cuts the claim in the year of purchase (same Folio). For most property acquired after 2024 and available for use before 2030, the reaccelerated investment incentive replaces that cut with a first-year claim of 1.5 times the class rate. Property is left out of the incentive when CCA was already claimed on it and either the buyer or a related person owned it before or it came in on a rollover; a rental moved in from an owner who claimed CCA on it is the common case (Regulations, subsection 1100(2); subsection 1104(4.01)).

CCA is not the amortization in the financial statements. The statements show amortization at GIFI 8670. The Act bars a deduction for depreciation except as it expressly permits (Income Tax Act, paragraph 18(1)(b)), so Schedule 1 removes the book amount and allows CCA in its place. The reconciliation is in amortization and CCA in corporate books. Claimed CCA lowers the UCC, and a later sale above the UCC can bring recapture, which Schedule 8 also calculates.

Can CCA create a rental loss in a corporation?

It depends on whether renting is the corporation's principal business. The Regulations cap CCA on rental property at the net rental income before CCA, so CCA cannot create or increase a loss. The cap does not apply to a corporation whose principal business throughout the year was leasing, renting, developing or selling real property it owns (Regulations, subsections 1100(11) and (12)).

The cap is counted across all the corporation's rental properties together. The Regulations give no percentage test for "principal business", so it is a question of fact. A corporation that also runs another business, or holds mostly other assets, may not meet it. Keep records that show what the corporation does.

A loss the rule allows is a non-capital loss, tracked on Schedule 4 and carried back 3 tax years or forward 20 tax years (Income Tax Act, section 111). Someone else acquiring control of the corporation, for example by buying its shares, limits how an earlier loss can be used (subsection 111(5)). A corporation that claims a CCA-driven loss without meeting the principal-business test has claimed more than the Regulations allow.

What goes in repairs, and what is capital?

A repair that restores a property to its original condition is usually a current expense. A cost that improves it beyond that condition, or replaces a separate asset, is capital (CRA: current or capital expenses). Repairs that put newly bought used property into suitable condition are capital.

A current repair goes to GIFI 8961. An improvement to the building goes to Buildings, 1680, and earns CCA with it. A separate asset such as an appliance goes to machinery, equipment, furniture and fixtures (GIFI 1740) in its own CCA class: Class 8 includes furniture and appliances, at 20% (CRA: classes). The full test is in rental repair: current or capital.

Do I charge or pay GST/HST on residential or commercial rent?

It depends on the unit. Rent from commercial real property is a taxable supply (CRA Memorandum 19.4.1). Rent from a home is exempt when the same individual has continuous occupancy for at least one month (Excise Tax Act, Schedule V, Part I, section 6; CRA Memorandum 19.2.2).

• Commercial rent. The landlord must register and collect GST/HST unless it is a small supplier, whose taxable supplies, together with those of any associated person, stay within the $30,000 limit (Memorandum 19.4.1). If a registered corporation does not remit the net tax, its directors can be personally liable unless they took reasonable care, assessable up to two years after they leave office (Excise Tax Act, section 323).
• Long-term residential rent. No GST/HST is charged. Input tax credits follow commercial activity, which excludes making exempt supplies (Excise Tax Act, sections 123(1) and 169(1)), so tax paid on costs of the exempt part is generally not recoverable.
• Rentals under one month. Short stays are generally taxable when the landlord is a registrant (Memorandum 19.2.2).
• A building with homes and shops. The commercial and residential parts are treated differently, so the records have to show which costs belong to which part.

The detail is in GST/HST on residential property and GST/HST on commercial property. Setting up the tax accounts is in recording GST/HST in your books.

What if the owner or a family member uses a unit, or pays costs personally?

A unit a shareholder lives in may be a benefit from the corporation. When a corporation confers a benefit on a shareholder, the value is included in the shareholder's income (Income Tax Act, subsection 15(1)). A relative living in a unit is caught too: a benefit the corporation confers on someone who does not deal at arm's length with a shareholder is treated as conferred on the shareholder, unless it is already included in someone's income (paragraph 15(1.4)(c)). Relatives by blood, marriage, common-law partnership or adoption are treated as not at arm's length (section 251). Whether there is a benefit depends on the facts, such as whether the occupant pays rent at a market level, so ask before a relative moves in. The corporation can deduct only an expense made to earn income from the rental (paragraph 18(1)(a)), so the owner's own living costs are not a rental expense. Keep that unit's costs apart from the rental units' costs, and see personal expenses paid by the corporation.

When the owner pays a corporate cost personally, the corporation books the cost and credits the amount it now owes the owner. The cost is not income to the corporation, and repaying the owner reduces the balance owed. See costs paid personally. The reverse, where rent lands in the owner's personal account, is in corporate income in a personal account.

Which other T2 schedules does rental income touch?

GST/HST is a separate return, not a T2 schedule. How rental income is taxed inside a corporation, and how it affects an operating company's small business limit, is in holding and investment corporations. Rent paid by an associated operating company can be treated as active business income to the extent the payer deducts it in computing its income from an active business carried on in Canada (Income Tax Act, subsection 129(6)). That changes the tax result, so ask before setting a rent between related companies.

Can I file the T2 myself with software, and what should my accountant get?

A corporation can prepare its own T2 only with CRA-certified software, and it files electronically through Corporation Internet Filing, My Business Account or an authorized representative (CRA: using tax preparation software). A corporation that must file electronically and files on paper is charged a $1,000 penalty (CRA: completing the T2). The software enters the numbers. It does not decide the land and building split, the CCA classes, the principal-business test or the GST/HST treatment. The return steps are in filing your corporate return, and the choice between doing the books yourself and hiring help is in doing your own books or hiring a bookkeeper.

Give the preparer:

• The purchase agreement and the closing statement, with the statement of adjustments
• The assessment notice or appraisal used for the land and building split
• Mortgage statements, with the year's interest
• Leases, a list of tenants and rents, and deposit records
• Property tax bills, insurance policies, and invoices for repairs and improvements
• Bank statements for the year, and the owner's loan records
• The prior T2 with its Schedule 8, if one exists
• The year-end statements: see year-end financial statements for a corporation

Example

All amounts are Canadian dollars and illustrative.

Buying a fourplex

A corporation buys an existing fourplex, built decades ago, from an unrelated seller for $1,200,000 with a $900,000 mortgage. It is an ordinary Class 1 building, not a new purpose-built rental. The assessment notice puts 30% on the land and 70% on the building, and the corporation keeps it as support for the split: $360,000 to land and $840,000 to the building. Legal fees to buy and land transfer tax of $10,000 are added to cost and, for this illustration, allocated in the same proportion: $7,000 to the building and $3,000 to the land. Land (GIFI 1600, no CCA) is then $363,000. The building (GIFI 1680) is $847,000, which is its UCC base, in its own Class 1 because it cost more than $50,000. The owner puts in the remaining $310,000 ($1,210,000 of cost less the $900,000 mortgage), recorded as share capital or as a shareholder loan, decided before the money moves.

A year of rent, and the CCA cap

The fourplex is the corporation's only rental property, so the CCA cap uses its figures alone. It earns $96,000 of rent, booked to GIFI 8141, and pays $70,000 of mortgage interest, property taxes and repairs. Net rental income before CCA is $26,000. Suppose that in a later year the building's UCC is $800,000, so the most it can claim at its 4% Class 1 rate is $32,000.

• If renting is the corporation's principal business throughout the year, it may claim the $32,000 and report a loss of $6,000.
• If it is not, CCA is capped at $26,000, so taxable rental income is nil, and the other $6,000 of CCA stays in the UCC.

In this illustration no tax is payable either way, but the T2 is still due six months after year-end.

The owner pays for a roof

The owner pays a $3,000 roof bill on a personal card. If the work patches the roof and restores its original condition, the corporation debits Repairs and maintenance, buildings (8961) $3,000 and credits Due to shareholder (2780 or 3260) $3,000. If it is a new roof of better material, the debit goes to Buildings (1680) and the cost earns CCA instead. When the corporation repays the owner, it debits Due to shareholder and credits the bank. The repayment is not an expense.

Different for you?

• A first T2, or the land and building were never booked. The opening balance sheet, the split and the CCA classes set every later year, and a wrong split carries forward, so they need a professional's judgment before the first return. See bookkeeping services, corporate tax and books for a new CCPC.
• Corporate and personal money are mixed in one account. The books have to separate them before the T2 can be right: rebuilding books from bank statements and catching up on overdue books. Untangling years of mixed money is work for bookkeeping services.
• You want to claim CCA that creates a loss. Whether renting is the principal business is a question of fact, and a claim that fails the test exceeds what the Regulations allow. The setup and the supporting records are work for bookkeeping services and corporate tax; see also amortization and CCA in corporate books.
• Several T2 returns are unfiled. Late-filing penalties grow by the month, and the books for the missing years usually have to be built first: catching up on unfiled corporate returns, with bookkeeping services and corporate tax.
• The owner or a relative lives in a unit, or the building mixes homes and shops. The benefit rule and the GST/HST split both apply, and the records need a professional's setup: bookkeeping services.
• The corporation rents to your own operating company. The rent can change how the rental income is taxed, GST/HST generally applies to commercial rent unless two closely related registrants file an election (one corporation must own nearly all of the other, so two companies you own side by side do not qualify), and the lease needs records that stand up. Start with holding and investment corporations and the GST/HST election between related companies; setting it up is work for bookkeeping services.
• A shareholder lives outside Canada, or is a US citizen. Where the owners live and who controls the corporation can change its status. The corporation must also withhold tax from dividends and some interest paid to a non-resident, and owes that tax itself if it does not (Income Tax Act, section 215): non-resident owners of a Canadian corporation and American owners of Canadian corporations.
• The corporation manages other people's buildings for a fee. That is a service business, not a rental-only corporation, so this page does not describe it: bookkeeping services.
• You are deciding whether to hold rentals in a corporation. Rental property in a corporation.
• The property is still in your own name. Moving rentals into a corporation.
• The rental is in the US. A Canadian corporation owning US real estate.