Even though most rental income is not considered business income, there are tax deductions to claim. Be sure you can make legitimate tax deductions on your claims. The Canada Revenue Agency disallows improper tax claims on expenses you cannot deduct, as well as refusing deductions for renting out your home at less than fair market value to your family and friends.
Do You Rent Out Your Property at Fair Market Value?
Before you claim a tax deduction, consider whether you are renting your property out at fair market value.
Fair market value constitutes the rent you get from tenants when advertising your rental suite to the open market in the newspaper. The CRA frowns upon tax claims for renting your home out for less than fair market value.
For example, you rent your basement apartment to tenants for $800 per month. Your tenants move and you rent out your basement to your sister for $200 per month. Because $200 per month is below the fair market value, you may not be able to make tax claims for expenses and you may not have to claim the rental income either as CRA considers this to be a cost-sharing situation.
How Much Do You Claim?
The CRA lets landlords claim certain expenses that are related to the rental property. Expenses such as the following can be claimed:
- home insurance
- mortgage interest
- property taxes
If you own a rental property that is separate and apart from your principal residence, you can claim the full amount of these expenses. However, if you rent out a portion of your principal residence, such as a room or a basement apartment, you can only claim the percentage attributed to your rental property. The CRA bases the percent on the square footage you rent out of your total home. For example, if your basement apartment is 800 square feet and the total square footage of your home is 2,000, you can claim only 40 percent of the expenses.
Current vs. Capital Expenses
When you claim an expense on a rental property, it is important to know if it is a current or capital expense.
- The CRA considers a current expense as one that takes place in the short term. Examples include painting the home or repaving the driveway.
- A capital expense is considered one with a long-term, long lasting benefit, such as a new roof or a new furnace.
Claim both expenses on Form T776 (Statement of Real Estate Rentals). Current expenses are claimed in the current tax year, while capital expenses are depreciated over the years to come based the depreciation rate provided by the CRA.
Tax Claims You Cannot Make
The CRA has a list of tax deductions you cannot make on your rental property. Expenses you cannot claim as deductions include:
- land transfer taxes (provincial and municipal)
- mortgage principal
- your own labour cost for doing home repairs
- the personal amount of your expenses such as utilities
- mortgage interest
- home insurance.