Q. I
understand that net rental income creates RRSP contribution room—so,
even as a retiree, I should be able to accumulate additional RRSP room.
Does foreign net rental income add to RRSP room?
When I do my Canadian taxes using tax preparation software, the
reported net foreign rental income doesn’t flow to the net rental income
line of the return, but instead flows to other income and is therefore
not taken into account to calculate RRSP room. Am I doing something
wrong or does foreign rental income not eligible?
–Jerry
A. Canadian residents are taxed on their worldwide
income. Foreign rental income is therefore taxable in Canada—as you
know, Jerry—but not everyone knows or reports this income. The income
may also be taxable in the country in which it is earned, and may
require filing of a foreign tax return as well. Foreign taxes paid are
generally eligible to claim for a foreign tax credit in Canada, often
reducing Canadian tax payable dollar for dollar to avoid double taxation
of the income.
If you have earned income and you are under the age of 72, you will
accumulate Registered Retirement Savings Plan (RRSP) room. The most
common forms of earned income are employment income and self-employment
income. RRSP room is calculated as 18% of your earned income, up to the
annual maximum, subject to certain adjustments.
For example, earned income may be reduced by certain deductions like
union dues and spousal support. RRSP room itself may be reduced by
pension adjustments for those who are members of company pension plans.
Rental income is considered earned income for RRSP purposes.
Specifically, it is net rental income that is eligible. Net rental
income is gross rental income minus deductions like mortgage interest,
property tax, insurance, and maintenance. Net rental losses, when
expenses exceed income, reduce earned income when calculating RRSP room.
Foreign net rental income is considered earned income for RRSP
purposes, Jerry. It may just be that you are not reporting it correctly
on your Canadian tax return. I know sometimes it can be difficult to
know how to report certain unique income sources, deductions, or
credits. I also know that retail tax software can be confusing. All
rental income should be reported on form T776–Statement of Real Estate
Rentals.
I have prepared thousands of personal tax returns over the past 20
years. I have a family member who prepares their own tax return using
retail tax software and invariably each year they have questions for me.
I always have a hard time navigating the software, despite knowing
personal tax very well. It seems every retail tax software is a bit
different.
The online forums for the tax software often have answers about where
and how to report income, deductions or credits, or you can get your
answers by posting a question to the forum for someone to answer. Some
software companies offer email or phone support for questions.
I think an important secondary question, Jerry, is whether you should be contributing to your RRSP based on foreign net rental income, even if you are accumulating RRSP room.
If you are looking for tax deductions, you can deduct depreciation on
your rental property. Capital cost allowance, or CCA, is generally 2%
of what you paid for the building in the year of acquisition and 4%
annually thereafter, on a declining basis. These rates apply to most
residential buildings, but some property types may have different rates
that apply.
CCA can be used to reduce your net rental income to zero, but not to
create a net rental loss. Reducing your net rental income will reduce
your earned income and resulting RRSP room.
CCA may be a preferable deduction to RRSP contributions, as no cash
is required to create the deduction. CCA is recaptured when you sell the
property or upon your death. So, any CCA that you claim may become
fully taxable in a high-income year if you have a large capital gain
upon selling it due to the appreciation in the property value. As such,
CCA may not be beneficial for someone in a low tax bracket to claim,
because they may pay more tax in the future than they save today.
If you are in a low tax bracket, Jerry, I would question contributing
to an RRSP in the first place. RRSP contributions may result in
immediate tax deductions and tax savings, but that tax reduction may be
short-sighted. Retirees are often better off taking RRSP withdrawals as
opposed to contributing to RRSPs, to minimize their lifetime tax
payable. However, this is not always the case, particularly for
high-income retirees, so it is important to consider your retirement
income planning based on your personal circumstances.
In summary, Jerry, I think you may be reporting your foreign net
rental income incorrectly in your tax software, as it should create RRSP
room. Consider whether claiming capital cost allowance is a good tax
plan, whether with or without contributing to your RRSP. Most
importantly, consider whether RRSP deductions are a good idea in
retirement, or, to the contrary, if you should be considering RRSP
withdrawals.
Jason Heath is a fee-only, advice-only Certified Financial
Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does
not sell any financial products whatsoever.