If tax efficiency and minimization is important to you.
Let’s go over a couple things.
For every dollar you deposit to an RSP you get money back either in the form of a larger refund or in a reduced balance owing. So some people want to know how much do you HAVE to contribute to their RSP to ensure they won’t owe. And this can be calculated using all your income, credits and deductions for the year.
When you earn rental income you have the opportunity to deduct expenses like repairs, utilities and interest. Another tool available to landlords to reduce their tax burden is something called CCA (or depreciation). It’s essentially an expense that you didn’t have to pay actual cash for, but is a deduction you can apply (until your rental income = $0) to account for the wear and tear of the property. You are eligible to claim anywhere from $0 to the maximum (which depends on your asset class). So if you (or your tax preparer) calculates that if you claim $2,000 in depreciation, you’d be able to move from owing taxes to a refund, that is an option for you. So this deduction HELPED YOU!
HOWEVER when you SELL your property - all the depreciation you’ve claimed over the years will come back into the equation. Let’s say you claimed $10,000 in depreciation over the last few years of owning your rental. Now you sell it. You will be paying tax on the total amount depreciation you’ve claimed over owning the property. It’s called recapture. And tax obligation this is IN ADDITION to the capital gains taxes you’ll be paying on the sale of the property.
If you sell your income property BEFORE age 71 this is where you’re gonna want to have some RSP room. When you receive the proceeds from the sale of your property you’ll benefit from a large RSP deposit to reduce your taxable income. Depending on the situation and how the asset is held, the year you sell the property will (hopefully) be big tax obligation year for you.
And if you don’t have the RSP room to be able to contribute, you know have one less strategy available to you to help you efficiently plan your tax strategy.