If you have rental income to declare, you can claim expenses incurred to earn that rental income. You can deduct reasonable expenses and these expenses could be current or capital expenses. Others are specifically excluded. You need to keep track of your expenses in writing and put your receipts in a safe place in case the Canada Revenue Agency (CRA) requests supporting documents to back up your claim.
Current Expenses and Capital Expenses
The two basic types of expenses are current expenses and capital expenses.
- Current expenses are the day-to-day costs related to the income property that have short term value and are incurred in the taxation year. These could include minor repairs and maintenance, advertising, etc.
- Capital expenses are capital improvements that add long-term value to the property, such as permanent additions to the building or structural improvements. These expenses are not immediately deductible as a whole but rather depreciated over time by claiming Capital Cost Allowance (CCA).
Expenses paid ahead of time, such as an insurance premium for the year on your rental property, are called prepaid expenses. The current expense that is deductible is the portion of the premium that covers the rental period you are claiming on your taxes.
For example: If your insurance premiums are $1,200 for one year, then increase to $1,400 when you renew your policy in April, you would calculate as follows:
- $1,200 divided by 12 = $100 monthly x 3 (Jan to Mar) = $300.00 +
- $1,400 divided by 12 = $116.67 monthly x 9 (Apr to Dec) = $1,050.03
- The total claim for the tax year is $1,350.03
Deductible amounts include for
- Advertising the availability of your rental property
- Legal, accounting and professional fees
- Maintenance and repairs, such as painting, fixing appliances, etc.
- Rental management fees paid to a third party to collect rents and do repairs
- Property taxes, utilities, insurance, etc
Other reasonable expenses related to the rental property are also deductible and a complete list can be found in this TurboTax article: Claiming Expenses on Rental Properties.
You can deduct vehicle expenses only when they are reasonable, necessary and you have receipts. There are also specific rules that apply to when you own only one rental property as opposed to two or more; be sure you’re aware of any and all tax regulations regarding your individual situation.
Interest and Fees
You can deduct the interest only on money you borrow to buy or improve your rental property, as well as the interest you pay to tenants on rental deposits. More information on deducting interest can be found here.
If you pay a fee to lower the interest rate on a mortgage, the deduction is spread over the remaining original term of the mortgage or loan. For example, if the term of your mortgage is two years, and in the second year you pay a fee to reduce your interest rate, it is a prepaid expense and deducted over the remaining term of the mortgage.
Expenses That Are Not Deductible
Although many expenses related to rental income are deductible as current expenses, there are some CRA specifically does not allow. These include:
- Land transfer taxes you paid when you purchased the property. They are part of the cost of the property and can usually be included in the CCA calculation for the building.
- You cannot deduct the repayments of principal on your mortgage or loan on your rental property, nor can you claim penalties shown on your Notice Of Assessment from the CRA.
- The value of your own services or labour is not a deductible expense.
- If you live in the building you rent out, you can only claim the amount of your expenses associated with the rented part of the building.
Keeping Your Records
You can use any format to keep your records: paper, electronic, or both. Keep a record of your income, all expenses current and capital, losses, and your business or GST number if you have one. The receipts have to show the following:
- the date of the purchase
- the suppliers’ information: name and address
- the full description of the goods or services
- the vendor’s business number if the suppliers are GST/HST registrants
If you are running your income from the property as a business or if you are an employer; keep a record of any GST deducted, payroll records, and partnership information.
You will need a detailed record if you sell or trade a property:
- Show the date you sold or traded it
- The amount of the payment or credit from the sale or trade-in
- The name and address of the buyer
TurboTax Premier 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.
*TurboTax Live™ Full Service is not available in Quebec.