Whether it is a basement suite, a condo, or a second house, rental income is taxable and has to be reported. The mechanics are straightforward. A few specific rules are where people go wrong.
Reporting the income
Rental income and expenses are reported on form T776. You report gross rent received, deduct eligible expenses, and the net figure is added to your income. If you own the property with someone else, each owner reports their share according to ownership, not according to who happens to collect the rent.
What you can deduct
Common deductible costs include mortgage interest (the interest only, never the principal portion of the payment), property tax, insurance, utilities you pay, repairs and maintenance, property management fees, advertising for tenants, and the accounting or legal fees related to the rental.
The distinction that matters most
A current expense keeps the property in the condition it was in, and is deducted in full in the year you incur it. A capital expense improves the property beyond its original condition or extends its useful life, and is added to the cost of the building, then deducted over time through capital cost allowance.
Repairing a section of damaged fence is a current expense. Replacing the entire fence with a better one is capital. Repainting is current. A new kitchen is capital. This is one of the most frequently reviewed areas of a rental claim, so the difference is worth thinking about before you file.
Be cautious with capital cost allowance
You may claim CCA on the building, but there are two important consequences. It cannot be used to create or increase a rental loss. More significantly, CCA claimed over the years is generally recaptured and taxed when you sell, and claiming it on a property that was at some point your home can affect the principal residence exemption. Many landlords are better off not claiming CCA at all. Ask before you start.
Renting to family, or below market
If you rent to a relative at less than a fair market rate, the CRA may treat the arrangement as cost-sharing rather than a business, which can mean losses are denied. Charging a proper market rent and documenting it keeps the arrangement clean.
Renting part of your own home
If you rent out part of the home you live in, expenses must be split reasonably between personal and rental use, usually by area. Only the rental portion is deductible.
Records
Keep leases, rent records, and every receipt, along with a clear file of capital improvements over the life of the property. That improvement history reduces your capital gain when you eventually sell, and reconstructing it years later is close to impossible.
If you have recently started renting a property, or you are unsure whether past returns treated it correctly, get in touch and we will review it with you.
A note on this article: tax rules and deadlines change. This article is general information, not advice for your specific situation - for that, talk to us.