You claim rental income and expenses on Form T776. Include rent collected from tenants as rental income in the current tax year. Claim tax deductions for any expenses related to your rental property. Common rental property expenses include home insurance, heat, hydro, water, and mortgage insurance. Claim the full amount of expenses if it is for a rental property, but only a percentage if it is for part of your principal residence.
Current or capital expenses
Some expenses can be deducted in full if it is spent to maintain the rental property, these expenses are called current expenses. for example, if you spend money to restore your property to its original condition, these expenses can be deducted in full. Other expenses which enhance the value of the property and has a long-lasting life has to be added to the value of the rental property and claim a capital cost allowance on them over the business years, these expenses are called capital expenses. for example, if you upgraded the floors from carpet to hardwood to increase the value of your property, the expenses have to be added to the value of the property and depreciated in time. For a better understanding of the differences between current or capital expenses, visit this CRA link.
Deduct property insurance premiums paid towards coverage on your rental property. Deduct only the current year’s coverage, even if your premiums provide coverage for over a year. Deduct the remaining premiums in the year they provide insurance coverage for. Claim the full amount if you are renting out a separate property or only a portion of it is part of your principal residence. If you paid $2,000 a year in insurance premiums for your rental property, you could claim the full amount on your tax return as long as the rental property is not your principal residence.
Claim a tax deduction for fees paid towards advertising your rental property. Newspapers, websites, and trade publications are all good places to advertise and claim a tax deduction. Unlike property insurance and utilities, claim the full amount of advertising since it relates fully to your rental property. If you spend $500 to advertise your vacant apartment in the newspaper for a month, you can claim the full amount as an advertising expense on your tax return.
Deduct mortgage interest you borrow to finance the purchase of your rental property. Do not claim a tax deduction for mortgage principal. Deduct funds borrowed to help finance improvements to your home. Only claim a deduction for soft costs. The Canada Revenue Agency defines soft costs as funds you borrow for construction, renovations, and upgrades to your rental suite to make it more suitable.
Also deduct fees related to obtaining your mortgages, such as the mortgage application, appraisal, and legal fees paid to your real estate lawyer. If you paid $2,000 to your real estate lawyer for closing costs, claim it on your tax return to help offset your rental income.
Property taxes are determined by your province and collected by your municipality. Deduct property taxes paid to your municipality in the current year. Claim only the portion that relates to your rental property. For example, if you paid $3,000 in property taxes on your principal residence and you rent out your basement apartment (representing 40 percent of the square footage of your home), claim $1,200 on your tax return.
Utilities are a major expense for landlords. You can claim a tax deduction for the portion of utilities related to your rental property or suite. Claim the full amount if you rent out the full property, or claim a portion if you rent out a suite in your principal residence. Deduct the following utilities related to your property, if you pay for them: heat, hydro, water, and cable.
COVID-19 Impact on Rental income
Both landlords and tenants are facing difficulties during the COVID pandemic. Landlords are facing challenges with financing, managing from distance, leasing, paying employees, etc. CRA offers COVID incentives to support your rental business during this difficult time whether through CERB or CEBA.
If you are running the rental income properties as a personal, you will be able to apply for CERB. If you are running your rental income as a business with a business bank account and a business number with CRA, you will be able to apply for CEBA.
Since the government had panned eviction during the pandemic to support renters in most provinces, you as a landlord will have to accept partial rents or no rents from some of your tenants, then find ways to fill the gap in the cash-flow. If you are still paying mortgages on your residential rentals or leases on your commercial rentals, you will be able to apply for deferred payments to overcome the losses from your tenants who are also requesting deferrals themselves.