Are you looking to reach mortgage freedom sooner? Renting out a part of your home can be a great way to subsidize your mortgage. Before you file your taxes, you’ll need to determine if the rent you collect is rental or business income. If it’s rental income, you’ll need to file T776 Tax Form: Statement of Real Estate Rentals. It’s important to keep copies of your receipts, because you’ll be able to claim expenses to help offset your rental income.
Rental vs. Business Income
An important question you’ll need to answer before you file your income tax is whether your rental income is considered rental or business income. The greater the number of services you provide to your tenants, the higher the likelihood it will be considered business income.
Most of the time, your income is considered rental income if you rent out a part of your property to tenants and only provide basic services, such as:
If you provide services beyond these, such as cleaning and meals, it will most likely be considered business income.
Why does it matter?
- While business income is subject to Canada Pension Plan premiums, rental income is not.
- Another major difference is the filing deadline: If you have business income, your filing deadline will be extended to June 15, while your deadline will be April 30 for rental income (regardless of structure, i.e., whether you’re a single owner or it’s a partnership).
Why Ownership Structure Matters
Consider the ownership structure before you claim rental income.
- If you’re the only owner, filing your taxes is nice and easy — you simply declare all the rental income.
- If you share ownership with someone else, such as your spouse or business partner, you are considered to be co-owners.
When you’re co-owners, you claim your share of the rental income as previously agreed upon with your co-owner. Just because you’re co-owners doesn’t necessarily mean you’re partners.
As co-owners, it’s important to determine whether you’re considered partners for income tax purposes. Canada Revenue Agency defines 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.”
As the owner of a rental property, you can deduct expenses incurred as long as they are considered reasonable.
There are two main types of expenses: current expenses and capital expenses. CRA defines a current expense as “one that generally reoccurs after a short period. For example, the cost of painting the exterior of a wooden property is a current expense.”
Meanwhile, CRA defines a capital expense as “generally gives a lasting benefit or advantage. For example, the cost of putting vinyl siding on the exterior walls of a wooden property is a capital expense.” The most common examples of current expenses include insurance, mortgage interest, property taxes and utilities.
Renting a Portion of a Residence
If you rent out a portion of your principal residence, you can only claim the percentage of the expenses attributed to the space you rent out. Also note that Capital Cost Allowance (CCA), which is an amount calculated based on a property’s depreciation, is an allowable deduction although most tax experts agree it is better to exclude it due to the capital gains implications should you sell your home.
Rental losses can occur for any number of reasons, such as unpaid rent. If your expenses for your rental property exceed your income, then you can claim a rental loss. Not only can your rental loss be deducted against your rental income, you can also deduct it against other sources of income. Lastly, CCA cannot create a deductible loss or increase an existing loss.
References & Resources
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