Depending on which province you are renting in you may be faced with 4-9 separate acts and regulations pertaining to the day to day operation of your rental properties. They cover everything from how big your windows have to be, who can change the locks, and whether pets are allowed. Of primary importance are rules concerning damage deposits. Specifically, we’ll consider the rules in Alberta and British Columbia.
In Alberta you can charge a full month’s rent for a damage deposit. In BC it is half a month’s rent. (Unless they have pets in which case you can charge an additional half that may only be used against pet related damage.) AND no damage deposit may be requested for manufactured homesite rentals.
Two days after you collect the deposit in Alberta you are required to put it in an interest-bearing trust account in a bank, treasury branch, credit union or trust company. Then, annually, you must pay out the interest to the tenant.
So, Let’s say your tenant pays $1000 for rent and you have charged them $1000 for their damage deposit. You go to the bank and put it in YOUR savings account set aside for damage deposits. If you put the money in a President’s Choice savings account in one year you’ll make $7.52 with their money. This is YOUR income that has no expense against it. Since it was made as an investment it is taxed at the highest rate - say 50%. So you will pay ‘3.76’ in tax to the government as your personal expense and then pass the whole “7.52” amount of money to the tenant. Or do you deduct the tax expense? Do they pay a capital gain on the money? If they do, that would mean the government collects a full 100% of the interest!
In BC you are required to pay a fixed amount of interest. The rate is 4.5 percentage points below prime on January 1st. Like the example above you rent the suite for $1000 but only collect 50% for your damage deposit. ($500.) Now let’s invest it at the specified rate. Prime = 1.75% - 4.5% =1.715 x $500. = $8.58.
So, in BC, your job is to deposit the money where you’ll make at least that amount of interest yourself. It would seem if you can make more, power to you! It’s a bit easier concerning your relationship with the Tenant since you will both know what they are to be paid. It still doesn’t deal with the issue of your capital gain.
At the end of the day there’s really no money at stake. $7.52 or $8.58 over the year. And whether the government would charge EITHER person capital gains is pretty unlikely, but it really begs the question: why pay interest at all?
S. Shamon Kureshi is a real estate expert based in Calgary, Canada. He regularly consults with Hope Street Real Estate Corp., an industry leading Calgary Property Management and Rental Company that provides rental homes to thousands of individuals and families in a variety of markets.
![[Valid RSS feed]](http://www.realestateproarticles.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites