Rental Income Versus Business Income

There appears to be a bit of confusion around how to declare income earned when renting your home – whether it is short-term via a service like Airbnb, or long-term (more than 6-months at a time to the same family).

What we do know very clearly, is that for Canadians who collect income from renting out their property, the Canada Revenue Agency (CRA) requires that income to be declared on their income tax return. But is it declared as rental income or business income? When does rental income become business income? What deductions are available to be claimed?

Let’s address all of those, and more in this post.

In most cases, the CRA establishes the difference between rental and business income based on the number and kinds of services that are provided for the tenants. When providing a space plus what the CRA considers to be Basic Services, such as; heat, light, parking, and laundry facilities, then the income earned is rental income.

If, however, in addition to the space, additional services are provided to tenants, such as; cleaning, security, and meals, then the CRA believes that you are carrying on a business and no longer earning just rental income.

The more services provided, the greater the chance that a rental operation will be classified as business income which means including self-employed business income when filing income taxes.

Declaring Rental Income

If you rent out a property, you must declare your Gross Rental Income on Line 12599 of your personal tax return. Then, you may deduct qualifying expenses to arrive at your Net Rental Income on line 12600.

As well, you have to file a statement of income and expenses to report the rental income earned in the calendar year (from January 1 to December 31). The Form T776 – Statement of Real Estate Rentals is used to assist with the calculation of rental income and expenses for income tax purposes.

Eligible Deductions For Rental Income

Any reasonable expenses incurred to earn rental income are able to be deducted, and the two basic types of expenses are categorized as being either current expenses or capital expenses.

The following is a list of expenses that are deductible:

Advertising – Amounts paid for advertising that your rental property is available
Insurance – Only the premiums for insurance coverage on your rental property for the current year are deductible. Where your policy provides coverage for multiple years, claim that coverage in the applicable year
Legal Fees – Related only to prepare leases or collect overdue rents, not incurred while purchasing the rental property.
Accounting Fees – Related to bookkeeping services, audits of your records, and preparing financial statements, as well as possible costs related to advice and help to prepare your income tax return and any related information returns, such as GST/HST returns or payroll returns.
Repairs and Maintenance – Eligible expenses must relate to repairs to the property for the purpose of earning rental income, including the cost of labour and materials, however, the “value” or your own labour is not an eligible deduction
Management and Administration fees – Amounts paid to a person or a company to manage the property, and paid or payable to agents for collecting rents or finding new tenants
Office Expenses – Including small items such as pens, pencils, paper clips, stationery, and stamps.
Prepaid Expenses – Are to be claimed in the year in which the benefits are received
Property taxes – Only for the period the rental property was available for rent.
Salaries, wages, and benefits, including employer’s contributions – Amounts paid or payable to superintendents, maintenance personnel, and others employed to take care of the property are deductible, such as; CPP, QPP, EI and Workers Compensation. The value of your own services, however, is not an eligible deduction. Insurance premiums paid to an employee for a sickness, an accident, a disability, or an income insurance plan are eligible deductions.
Travel – Related to collecting rents, supervising repairs, and managing properties are eligible. Including the cost of getting to your rental property, but do not include board and lodging along the way there or back.
Utilities – Gas, oil, electricity, water, and cable, if the rental arrangement specifies that the property owner pays for the utilities.

Reporting Self-Employed Income

If your rental property qualifies as a business, then you would report your self-employed income to the CRA on Form T2125, Statement of Business or Professional Activities, and submit it with your taxes. While a separate form would need to be prepared for each business being reported, having multiple rental properties does not constitute unique businesses, and together, they represent your rental property business.

Form T2125 reports income earned from rental properties, and all of the deductions incurred while operating this business. As a small business owner, you may also qualify to deduct expenses related to a home office; however, if you only declare rental income, you cannot deduct these expenses.

Home Office Expenses

To qualify, your home office must be the place where you conduct the majority of your business or a space reserved exclusively for work where you meet clients on a regular basis. For example; if you have a home office but you spend most of your time in the field, working on property maintenance, you do not conduct the majority of your business in your home office, so it does not qualify for the deduction based on the first requirement.

However, if you use the space exclusively for work and never for personal use, and you meet potential tenants there weekly, it meets the second requirement and qualifies for the home office deduction.

Current Expenses vs Capital Expenses

Whereas a current expense generally reoccurs after a short period, such as the cost of painting, a capital expense generally provides a lasting benefit or advantage, such as renovations which extend the useful life of the property or improve it beyond its original condition. These expenses are deductible but rather in the year the expense was incurred, they are spread out over the anticipated life of the expense based on guidelines provided by the CRA. The annual deduction is called the Capital Cost Allowance.

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Rental Income Versus Business Income