Vacation Rental by Owner: What renting your cottage means at tax time

1. Tax on Rental Income

Although tax time is months away, it is an important factor in your cottage rental. The income you receive from tenants must be declared on your tax return and may push your total income to the next tax bracket. In addition to a higher tax bill, that extra income may have other consequences. If high enough, the rental income may disqualify you from benefits such as the GST/HST credit or Canada Child Benefit. If you are a senior, the extra income could make you ineligible for the Age Amount Credit or result in an OAS Clawback.

2. Income minus expenses

The good news is that you can deduct related expenses from your rental income. Good record keeping is essential to ensure you’re claiming all eligible expenses; so be sure to make a note about each receipt related to the rental before you file them away. You’ll thank yourself next April. Everything from the cost of placing an advertisement to paying the neighbour’s kid to mow the lawn is an eligible expense for your rental.

3. Oh the math!

Prorated expenses

Whether you rent the cottage for a few days, weeks, or months during the summer, there will be some calculations to do at tax time to figure out the amount of your eligible expenses. The calculation becomes more complex if you use the rental yourself during the same season. You’ll need to calculate your portion of use during the season and remove that percentage from your expenses.

If you use the property for both personal use and earning rental income, you will have to prorate the expenses.

For example;

Let’s say you rent out your cottage for 13 weeks in the summer and use it yourself during the rest of the year. Because the cottage was rented for a quarter of the year (13/52) annual expenses such as property taxes and insurance may only be deducted at the ¼ rate. If the insurance on the cottage is $500/year, when it’s time to prepare your tax return, you may only claim $125 as a deduction.

However, if you use the property during those 13 weeks for your personal use, you have to calculate the percentage of your use and deduct them from the expenses.

Utilities and Maintenance

Not all expenses have to be prorated. Deduct the utilities that are related to the rental period only, while the remainder of the year’s bills are considered for personal use. Depending on your billing cycle, the math may be simpler for this one.

If you pay someone to tend to the yard during the rental period, save the receipts. That’s an eligible expense at tax time. If you take on these duties yourself, your labour is not a qualifying expense although you could claim out of pocket expenses such as gas for a mower, etc. Same goes for repairs. If you fix the broken air conditioner yourself, you may only claim the cost of parts, not your own labour. If you pay a repairman, the entire cost may be deducted.

Expenses such as the cost of significant repairs/maintenance or the purchase of an appliance are considered to be Capital Costs. Capital costs are deducted over time at a rate set by CRA.

For example;

If you pay $1000 for a new fridge for the cottage, that class 8 appliance translates a deduction of only $25 this year.

$1000 x 20% (the class 8 rate) x 25% (the part of the year it’s a rental) x 50% (CRA only allows half of the CCA deduction to be applied the year you buy the asset) = $25.

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.