If you are renting a real state property that you own, you are considered to have a rental income. Whether you rent a building, a room in your house, or a commercial place, you have to declare your income or losses in your income tax return. CRA governs the expenses you can claim under your rental income and the rules of splitting the income with other partners.
Rental Income or Business Income
Depending on the services you provide to your tenants, you may have a business rather than rental income. For example; if you are renting a space or property where you provide meals, cleaning, or other services in addition to the rented space, you most likely have a business. As a result, you will be required to file Form T2125 — Statement of Business or Professional Activities.
If you simply provide the use of space in a home, apartment building, or office, as well as basic services such as electricity, parking, and laundry facilities, the CRA will not consider your rental enterprise a business. You are required to file the T776-Statement of Real Estate Rentals form to report your rental income and expenses even if you have a loss.
Share of Ownership
Before you can determine how much of the rental income to declare, you need to know how much of the property you own.
If you are the sole owner, Canada Revenue Agency considers you to be the only owner, and you declare all of the income.
If you and your spouse, common-law partner, friend, or other person own the rental property, CRA considers you to be co-owners. As co-owners, you declare a portion of the rent as decided in a written or verbal agreement between the owners. Once co-ownership is established, you need to determine if a partnership exists between you and the other owner. CRA describes a partnership as “a relationship between two or more people carrying on a business, with or without a written agreement, to make a profit. If there is no business in common, there is no partnership.”
In some cases if you have a partnership with a co-owner of a rental property, you must include a slip T5013, Statement of Partnership Income with your tax return if one or more of these conditions are true:
- Your revenue and expenses exceed $2 million or there is $5 million in assets
- The partnership is a tiered partnership or corporation
- The CRA asks you to provide one.
Declaring Gross Income
You can report the gross rental income you earned in the calendar year from January 1 to December 31 using two different methods:
Accrual method: report the income in the fiscal period you earn it not when you received it. You deduct the expenses in the year you incurred them not when you paid them.
Cash method: if by the end of the year you have received all the income you earned and have no outstanding expenses, you can use the cash method. Report the income in the fiscal period you received them and deduct the expenses in the fiscal period you paid them. If you use the cash method and receive a postdated cheque as security for a debt, include the amount as income when the cheque is payable.
Determining Expenses
To claim expenses against your rental income, you need to determine if the expense is a current expense or a capital one.
- A current expense is defined as one that happens over a short period of time, such as repairing a wall or painting a room. It doesn’t add value to the property nor it can be ignored.
- A capital expense has a lasting benefit to the property, such as paving the driveway or putting in a pool. It adds value to the property and it could be a condition to sell or made in anticipation to sell.
Current expenses: you can deduct from your gross income the costs of utilities, property taxes, interest, advertisement, home insurance, and maintenance costs.
Capital expenses: expenses such as adding attachments to the property, furniture, a new furnace or air conditioner, etc. cannot be deducted in full. You can deduct a depreciation value called capital cost allowance (CCA) every year until you use up the whole amount or sell the property.
Losses
If your rental expenses are more than your rental income, you have a rental loss. This loss can be deducted from your rental income as well as any other source of income you may have. Unpaid rent also is considered a rental loss. All or a portion of the unpaid or uncollected rent must be owing at the end of your tax year, be part of your declared income for the current or a previous tax year, and be uncollected during the current year.
CRA requires that you provide proof that you were unable to collect the rent. This can be by way of a letter from the tenant refusing to pay, notice to creditors from a bankruptcy trustee, or proof that you tried to collect the rent without success. If you collect the bad debt in the following year, it needs to be claimed in that year as income.
Net rental Income
The result of deducting your expenses from your gross income is your net rental income. While the gross income is reported on line 15900 of your income tax and benefit return, report the net income on line 12600. Your net income can be a negative value if you are reporting a loss.
GST/HST Rebate
The landlord who purchases a newly constructed building or a substantially renovated residential building is eligible to claim the GST/HST rebate for new residential property.
Capital Gain or Loss
If you sell your rental property or any tools that you claimed a CCA for, you might realize a capital gain or loss. You will have to report the gain or loss on Schedule 3 as well. The fair market value of the resident at the time tax was payable on the purchase must be less than $450,000.
TurboTax Self-Employed offers an easy step-by-step process to claim your rental income and expenses. The software helps you fill the T776 form schedule 3 with your income tax return. Consider TurboTax Live Assist & Review if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.
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