Whether it’s an apartment, a condo, a house, an office space or even a single room in your home, renting out a property you own can be a way to grow your savings or simply help make ends meet with a stable, predictable source of monthly income.
But don’t forget about the tax implications.
If you’re a landlord, knowing how your rental income is taxed helps you make the most of this revenue stream, lessen the financial impact of rental losses, and avoid nasty surprises at tax time.
So let’s get started.
- Expenses associated with preparing and maintaining your property for renters are deductible and can help shelter your rental income from taxation.
- Some current expenses, such as utilities and minor repairs, can be deducted in full, while other expenses, such as a renovation that adds long-term value to the property, can only be depreciated over time.
- If you have a tenant whose rent remains unpaid at the end of the tax year, you can claim a loss by deducting the amount owed from your gross rental income. If the amount owed to you has been included in the gross rental income, it can be deducted.
What is rental income?
Rental income is revenue you’ve earned from renting out properties you own or are making use of. Examples of rental income include rent earned from an apartment, condo, house, office space (or part of it), or even a single room in your home.
How do you calculate rental income?
Here’s a high-level view of how to calculate rental income, expenses and losses with a view towards minimizing your taxes:
- Calculate your gross rental income. This includes all rent payments you receive in cash, by cheque, or via money transfer.
- Calculate your expenses. The Canada Revenue Agency (CRA) lists out all eligible rental expenses landlords can claim. The more eligible expenses you claim, the more you’ll reduce your taxes.
- Complete the Statement of Real Estate Rentals form (T776)
For more information, check out our article on calculating rental income and choosing the right accounting method to claim it.
TIP: Keep track of your expenses in writing and put your receipts in a safe place in case the CRA requests supporting documents to back up your claim.
Claiming expenses on rental properties
What can you write off?
Claiming expenses is a great way to reduce your taxable rental income, but not all deductions are created equal. While some expenses can be written off in their entirety, others can only be claimed, in part or over time. Here’s the breakdown:
Operating expenses: Also referred to as “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, maintenance, advertising, etc.
Capital expenses: Capital improvements that add long-term value to the property, such as permanent additions to the building or structural improvements. These expenses aren’t immediately deductible, but rather written off over time by claiming Capital Cost Allowance (CCA).
Prepaid expenses: Rental property expenses that are paid ahead of time, such as a home insurance premium for the year, are indeed deductible. But only the part of the premium that covers the rental period you are claiming on your taxes.
Interest and fees: Deduct interest on whatever money you borrow to purchase or improve your rental property. You can also deduct the interest you pay to tenants on their rental deposits.
TIP: You can deduct vehicle expenses, but only when they are reasonable, necessary, and you have receipts.
What expenses are NOT deductible?
There are some expenses the CRA specifically doesn’t allow:
- The market value of any services or labour you perform isn’t a deductible expense.
- If you live in the house or building you rent out, you can only claim expenses associated with the rented part of the building.
- The land transfer taxes you paid when you purchased the property aren’t deductible. They’re part of the cost of the property and can usually be included in the CCA calculation for the building.
- You can’t deduct payments towards your rental property’s mortgage or loan– except towards the principal portion, you can write off the interest as an expense.
- You can’t claim penalties shown on your Notice of Assessment from the CRA.
How to claim rental expenses
For an overview of how to calculate rental income and what deductions and expenses you can claim on your rental property, check out this video:
How is rental income different from business income?
The CRA sees rental income and business income as two very different things. They have different write-offs, different forms, and may be treated differently at tax time.
You can determine whether your rental income qualifies as ‘business income’ or ‘property income’ by the type of services you provide:
You provide the use of space in a home, apartment building, or office, as well as basic services such as electricity, parking, and laundry facilities.
Form T776: statement of real estate rentals
You are renting a space or property where you provide meals, cleaning, other products or services in addition to the rented space.
Form T2125: statement of business or professional activities
What if you own a rental property with a spouse?
Co-owning versus partnership
If you own a rental property with your spouse or common-law partner, chances are the CRA considers you to be co-owners. You’re only considered partners if you meet one or more of the following conditions:
- Your revenue and expenses exceed $2 million.
- You have $5 million in assets.
- You’re legally considered a tiered partnership or corporation.
Not only are the tax implications of ‘co-owning’ versus ‘partnership’ different, but every province or territory has its own legal definition of the term ‘partnership’.
Do both spouses claim rental income?
Whether you and your spouse are co-owners or partners, both of you must report your share of the rental income (or loss) for the calendar year in proportion to your ownership (which is likely to be 50–50 if you are married).
Unless the proportion of ownership changes, your rental income must be reported in the same proportion every year.
Claiming a loss on rental property
What is a rental loss?
When turning a profit from your rental property, things don’t always work out as planned. When your rental expenses are higher than your gross rental income (the amount you receive before deducting expenses), this is considered a rental loss. You can deduct it against your other sources of income.
However, claiming a loss is only possible if you rent out the property at fair market value. For example, let’s say your rental apartment typically rents for $800 per month, but you rent it to your sister for $300 per month. You can’t claim a rental loss in this scenario.
How do you claim a rental loss if your tenants don’t pay their rent?
If, after repeated attempts, you’re unable to collect rent from your tenants, you can deduct these losses from your gross rental income using Form T776, Statement of Real Estate Rentals.
To claim this deduction:
- Your tenants must owe you rent at the end of the tax year.
- The rent must have been uncollected during the tax year.
- You must include the rent in your income.
Be sure to provide the CRA with proof you were unable to collect the rent, such as a notice to creditors or letters to your tenants asking for the rent.
What if you rent out part of the home you live in?
Renting out a spare room in your house or even your entire basement is a great way to ease the burden of a sky-high mortgage.
When you rent out part of the home you live in (aka your ‘principal residence’), the CRA may consider that you have changed the use of your house. This could limit your access to the principal residence (tax) exemption (PRE) if you go on to sell your home at a profit.
On the bright side, this shouldn’t be an issue if:
- The rental space is a small part of the house.
- No structural changes were required to make the rental unit.
- You didn’t claim the rental portion of the dwelling as a business expense.
Meeting these three conditions demonstrates you are an average homeowner trying to ease the cost of housing. And who doesn’t want that?
Ready to report your rental income and expenses? TurboTax Premier makes it easy with step-by-step prompts. For unlimited help and advice as you do your taxes, plus a final review before you file, consider TurboTax Live Assist & Review. Or use TurboTax Live Full Service*, and have a tax expert do your return from start to finish. Being a landlord may come with its headaches, but with TurboTax, filing taxes won’t be one of them.
*TurboTax Live™ Full Service is not available in Québec.
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