If you are tired of the ups and downs of the stock market, the real estate market can seem like a safe haven. When purchasing a rental property, it is important to understand the income tax implications.
The Canada Revenue Agency (CRA) treats pure rental properties differently than your principal residence.
- You need to declare rental income on your tax return.
- You also have the option of claiming capital cost allowance on major renovations, such as new windows.
Whether you are renting out a room in your house, a basement apartment, or an investment property, you have to report the income to the CRA.
You need to complete and file Form T776 (Statement of Real Estate Rentals) with your income tax return.
- On this tax form, you declare the rent received from your tenants.
- You can also claim expenses for your rental property.
If you rent out your principal residence, you can claim a tax deduction for the percentage of the expenses (based on square footage or percentage of living space) that the rental suite occupies. For example, if you rent out your basement apartment and it occupies 40 percent of your home, you claim 40 percent of your household expenses.
Expenses you can claim include:
- home insurance
- mortgage interest
The only exception when you do not have to report rental income to the CRA is when you rent a room below fair market value.
For example, if you rent a bedroom in your home to your adult child for $25 per week until he can find a permanent home, you are not required to report the income to the CRA. However, you can’t deduct expenses, and your child cannot claim a rent credit (available in certain provinces) as this is considered to be a cost-sharing arrangement.
Maintenance and Repairs
You have to be careful with the tax treatment of any repairs and maintenance you perform on the property. You can claim Capital Cost Allowance (CCA) for any long-term renovations, such as a new roof or windows, but it has tax implications.
- If you rent out your principal residence, claiming CCA means that you have to pay capital gains when you sell your home.
- You may also be subject to recapture of CCA.
A recapture can happen if the proceeds from the sale of a depreciable rental property are more than the total of the undepreciated capital cost (UCC) of the class at the start of the year and the capital cost of any additions during the year. This leads to a negative value of CCA, which is added to your taxable income. In simpler terms, the amount you are getting in the sale is more than the value of the item you have been depreciating, so you have a “gain” that you can be taxed on.
Many landlords subsidize their mortgage by renting the basement in their principal residence. When you rent out your family home, you have the option of claiming CCA.
- If you decide to claim CCA, it leads to tax savings in the short term, but you have to pay capital gains when you sell your home.
- If you decide not to claim CCA, you do not get to depreciate major renovations, such as a furnace, but you do not pay capital gains when you sell your house.