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Property Rental Issues / Expenses
Taxes on Real Estate in Canada - Property Taxes, Vacancy Taxes, Underused Housing Taxes
Expenses are only deductible when incurred in order to earn income. If you are renting at a price that is less than market value, perhaps because you are renting to a family member, then you will not be able to deduct any rental expenses. You would also not report the income.
See the Canada Revenue information Renting below fair market value.
Rental losses can generally be used to reduce income from other sources. If the rental loss exceeds income from other sources, and cannot be deducted on the current year tax return, it becomes a non-capital loss, which can be carried back or forward to reduce taxable income in other years.
Net rental income or loss is reported on line 12600 (line 126 prior to 2019) of your personal tax return, when the rental income is not considered business income. When it is considered business income, it is reported on lines 13500 to 14300 (lines 135 to 143 prior to 2019). Both of these types of net rental income are included in "earned income" for purposes of calculating your allowable RRSP deduction limit for the following year. For property income rentals, the net income is calculated by completing form T776 Statement of Real Estate Rentals. This form is used whether the property is in Canada or in another country.
Rental income and expenses can be recorded using the cash basis of accounting, unless the property rental is considered business income, in which case the accrual basis of accounting must be used. See Rentals - Property or Business Income for more information.
If you rent out one or more rooms in your home, or if you own a rental property, there are many expenses that can be deducted in calculating your net rental income. These expenses include mortgage interest (but not principal), property taxes, utility costs, house insurance, maintenance costs, advertising, and property management fees.
Capital cost allowance (CCA) may be claimed based on the purchase price of the building, furniture and fixtures, etc., but not the land, and may not be used to create or increase a rental loss. If you only rent a portion of your home, then you would only be able to claim a portion of the CCA, and this may result in the loss of the principal residence exemption when you eventually sell your home. The claiming of capital cost allowance will probably result in a recapture of the CCA when the property is sold. This will happen if the selling price of the building is greater than the remaining undepreciated capital cost (UCC) at the time of sale. The difference between the original cost and the UCC will be added back to income. If the selling price is greater than the original cost of the building, then the difference between the selling price and the original cost will be a capital gain. When purchasing or selling a rental property, it is important to break down the purchase or sale price between buildings and land.
If you rent out only a portion of your home, you would only be able to deduct a portion of the costs. If you rent a room to a friend or relative at less than fair market value and this results in a rental loss, you would not be able to deduct the rental loss. Any costs which are directly related to the rental portion of your home will be 100% deductible, and costs which relate to the whole building, such as property taxes and insurance, would only be partially deductible. The expenses can be split using floor area or the number of rooms that you are renting, as long as the split is reasonable.
A change in use of your home from personal property to rental property, or from rental property to personal property, can result in a deemed disposition for tax purposes. This means that you will be considered to have sold your home and repurchased it immediately thereafter for fair market value. There are many factors which affect this, and professional advice is recommended. See our article Change in Use of Real Estate - What Happens if I Move into my Rental Property, or Start Renting out my Home? for more information.
General rules regarding whether an item should be capitalized (capital expense) or can be expensed (current expense):
CRA indicates the following criteria should be used when determining if an expense is a capital expense or a current expense:
Unfortunately, sometimes it is difficult to determine if a cost should be capitalized or expensed, but the above guidelines will hopefully help you.
The following guidelines are provided by Canada Revenue Agency:
If you own one rental property, you can deduct reasonable motor vehicle expenses if ALL of the following conditions are met:
- you receive income from only one rental property that is in the general area where you live;
- you personally do part, or all, of the necessary repairs and maintenance on the property; and
- you have motor vehicle expenses to transport tools and materials to the rental property.
Motor vehicle expenses incurred to collect rents are not deductible, but are considered personal expenses.
If you own more than one rental property, then the above motor vehicle expenses are deductible as well as motor vehicle expenses incurred to do any of the following:
When you own more than one rental property, the above expenses are deductible even if your rental properties are located outside the general area where you live. However, the rental properties must be located in at least 2 different sites away from your principal residence.
For all motor vehicle expenses, you must keep receipts, and you must keep a log of your total mileage driven, and the mileage driven re your rental properties.
If your rental property is in another country and the cost exceeds $100,000 Canadian, including the cost of any capital improvements made after the original purchase, then you must complete form T1135, Foreign Income Verification Statement. There are penalties for not completing this form.
See all our articles related to Property Rentals.
Rental Income Tax Guide (T4036) which goes into detail about deductible expenses, capital cost allowance, deemed dispositions, splitting of expenses between personal areas and rental areas, and most issues regarding property rental.
Tax Tip: Get professional accounting/tax advice to set up your accounting records for property rental, and keep complete and accurate records.
Revised: July 31, 2023
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