What is Rental Income in Canada?
Rental income is the money or value you receive when you rent out property that you either own, or have the use of. The property may be yours wholly, or owned with someone else. Essentially, if you are earning income (money, value of goods received, etc.) from renting out a house, room, office, apartment, or any other property whatsoever, you are earning rental income.
Is it classified as Rental Income or Business Income?
To determine this, you will need to take into account the types of services you provide for your tenants. If the only service you provide is renting the space out, it is likely you are earning rental income. However, if you provide additional services to tenants, such as routine security checks/security systems, cleaning or meals, you are likely to be deemed to carry on a business. Generally speaking, the more services you provide to the tenant, the greater the likelihood the CRA will deem you to be running a business. As an example, a bed and breakfast may be considered business income because the work being expended is much more than just renting out a room.
The Canada Revenue Agency takes a hard look at those earning income from rentals while claiming it as business income. So be sure you check with a tax professional before making this determination.
Calculating your Rental Income or Loss
If at any point during the year you received rental income, you must file a statement of income and expense along with your tax returns. This is done by completing CRA form T776 which provides space to input rent, expenses and any capital cost allowance (CCA).
When filing out the form, the fiscal period will always be January 1 to December 31, except if it is the first year of your rental operation, in which case the start date will be the date you began renting the property out.
Generally you will need to report rental income for the fiscal period you earn it, regardless of when you actually receive the rent payments (the same goes for calculating your expenses).
In most circumstances, if you have rental income or rental losses, that amount must be reported by the person who owns the rental property.
If you can prove that you have uncollectible rent from a tenant, that amount can be deducted from your gross rental income. To prove rental is uncollectible, you must demonstrate that the debt is:
- Owing to you at the end of the tax year;
- Uncollectible during the tax year; and
- Included or deemed to have been included in your income for the year or a previous tax year.
Be sure to have proof of this, as the CRA will always ask for it when reviewing if a debt is uncollectible.
As a property renter, you are able to deduct any expenses you incur to earn rental income that are reasonable. The two basic types of expenses are:
- Current expenses; and
- Capital expenses.
Current expenses are recurring expenses that provide a short-term benefit. You can deduct current expenses from your gross rental income in the year you incur them.
As for capital expenses, they provide a benefit that usually lasts for several years. Generally, you cannot deduct the full amount of these expenses in the year you incur them. You will deduct these types of expenses over a period of several years (this is where the CCA mentioned earlier comes into play).
If you live in the same building/unit that you are also renting out, you can claim the amount of the expenses that relate to the area that is being rented out.
For items that relate 100% to the rented rooms only, such as repairs and maintenance, you can deduct the total amount of the expenses.
For items such as insurance and taxes that relate to the whole building, you can only deduct the portion that relates to the rented rooms/units.
Lastly, there are some expenses that cannot be deducted no matter the situation and those include:
- Land transfer taxes;
- Mortgage principal; and
- Value of your own labour.
Overall, knowing how to calculate gross rental income, and which expenses are deductible, and which are not, seems straightforward, but if not executed correctly, can bring about unwanted tax consequences. If you have any questions or need any assistance regarding your rental property, or any tax matter, please feel free to contact us!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.