Rental Income and Taxes

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Have you thought about buying a rental property or renting part of your house for income? This article will review the basics of renting a property. To learn more, visit the CRA website and look for rental income.

Rental income is when you rent a property to someone else. Property is generally considered real estate, but it can be anything that can be rented such as a car, snowmobile, power tools, computer, etc. We expect there to be profit because if there is no money, there will be no tax to pay. In most cases it would still be necessary to declare the activity, but renting something usually assumes that the money will be earned over time.

Rental and business income

If you rent a property only, this would be considered rental income. If you provide a service that goes with the property and charge for it, that would be considered a business. The classic example to show the difference is a Bed and Breakfast. Since there are meal and laundry services that can be provided, this is considered a business rather than simply having a place to stay on the property and do your own cooking and cleaning. If there is a business and the rental of a property is a related part of it, then the rental will be considered part of the business. For example, if you make auto parts and temporarily rent part of your space, that rental would be part of your auto parts business rather than rental income.

What difference does it make if your activity is a business or not?

The differences between rental and business income is that rental income transferred to a spouse or child can be attributed to the person who transferred it, while income from a business does not Don't have this restriction. This means that whoever paid for the rental property should report the income for tax purposes. If you have children involved in sharing the benefits of a rental versus a business, it would mean a difference in who can report income and expenses. Rental income is earned where the owner of the property resides, while business income is taxed at the place of business. If you have multiple locations for rental properties or multiple businesses with different tax rates, this can mean a higher or lower tax bill depending on where the businesses are located. Available deductions may differ between rental and business income. There are different rules regarding depreciation of assets or capital cost allowance (CCA) for rental properties as opposed to businesses. Rental income would not be subject to CPP deductions, but business income would be. A rental property has a calendar year reporting period, but a business can change this at any time of the year. Depending on your situation, these differences can save you money or create a larger tax bill.

How do you report your rental income?

Rental income is reported on Form T776 – Statement of Rental Income found on the CRA website. This form would be submitted with a personal income tax return as an additional document. If the rental is part of a business, the form to use is T2125 – Statement of income from commercial and professional activities which is the business form. This would also be added to a personal income tax return as an additional document.

Current and capital expenditures

A current expense and a capital expenditure represent money spent during the current tax period. If an expense occurs to maintain the property maintained and in the same working condition as before the money was spent, this would be called a current expense. Examples of this are the day-to-day costs for operating the rental property – such as utilities, insurance and property taxes. A capital expenditure is money spent on something that should last more than a year and that is either a separate item acquired for the good or an improvement in the good. If the money spent made the property more valuable or useful compared to the contrary, it would be called a capital expenditure. An example of a separate item would be a kitchen appliance inside the rental unit. This device should last more than a year, can be moved to another part of the house, so it is a separate item, and it is used by the tenant, which constitutes a viable deduction expense. If there are costs incurred to set up a property or make it available for rental, these costs would be considered capital expenditure and would be part of the acquisition cost rather than separate expenditure. The intention behind the money and the condition of the property before and after the expenditure are important in determining how the money spent should be treated for tax purposes.

Tax treatment of current and capital expenditures

The main difference between current and capital expenditure is the timing of their deduction. Current expenses are deducted during the year in which they occurred in full. A capital expenditure would be deducted over the life of the asset, which generally means a period of several years. This means that expenses would be deducted more slowly. Spreading the deduction over several years is called amortization. This is calculated by looking up the class of the item or expense, finding the corresponding depreciation rate and then using it as a partial deduction each year until the expense has been fully accounted for. For example, if you bought a device and it was a class 8 item, the associated depreciation rate would be 20% per year. This means that if you buy a device that costs $ 1,000, you can deduct 20% from that $ 1,000 or $ 200 a year.

Amortization of the asset itself

The calculation of the depreciation on the property itself is a choice that must be made by the taxpayer. There are pros and cons to claiming these expenses. The first factor to keep in mind is that depreciation of the property cannot be used to create a loss on the rental of the property. If your property is not so profitable, you won't be able to claim a lot of depreciation even if you want to. The second factor to keep in mind is that if you ask for depreciation, you will likely have to pay more taxes later when you sell the property. Land and buildings do not very often decrease in value. When there is a sale, there is usually a capital gain committed and taxes will be paid on a fraction of that gain. If you claimed depreciation en route before the sale, your tax bill would tend to be higher than otherwise.

Do you use the property personally?

If you rent something and use it personally at the same time, the rental and personal use part should be divided in one way or another. Indeed, everything that is used for personal reasons would not be deductible or declared in a tax return, but a rental property would be. If it is a rented house, the space would be divided into personal use and rental space, and all expenses would be prorated to reflect the share of expenses that should be assigned to the rental property.

The rules discussed in this article are very general and will apply to most rental situations. For more specific situations and more details, visit the CRA website.


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