Real estate rentals

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Rental income is earned by renting space and providing only basic services, such as heating, air conditioning, and building maintenance. If additional services, such as meals, cleaning, fresh linen and washroom supplies, among others are provided, the rental income may be considered business income. The more services provided, the greater the chance the rental operation is a business.

TAX TIP
Profits and losses from rental property can affect your RRSP deduction limit.

Rental income received from real estate might, under certain circumstances, be considered by the CRA to be either income from a business or income from property. That is a key distinction because the two are sometimes treated differently from a tax standpoint.

Strategy
If you are renting out a property that you also use personally, such as a cottage, be sure that you keep separate, meticulous records of expenses incurred for personal use and rental use of that property.

Here is a list of the most deductible expenses that may be deducted against rental income are:

  • Mortgage interest
  • Property tax Insurance
  • Maintenance and repairs
  • Heat, hydro, water
  • Accounting fees
  • Condo fees
  • Landscaping
  • Office supplies
  • Fees paid to find tenants

Non-deductible expenses include the following:

  • Mortgage principal
  • Land transfer tax
  • Penalties on your Notice of Assessments
  • Value of your own labour
  • Legal fee incurred to purchase the property
  • Personal portion of expenses
  • Cost of land

Rental of your own residence

When renting a portion of your principal residence, you must be careful not to mix personal and business expenses. Remember the following when renting out your principal residence:

–          Expenses of the rental activity are deductible 100% such as: advertising, cleaning, and cutting keys.

–          Expenses shared with the rest of the house are deducted only proportional with the space rented. These expenses are: insurance, water, heat, maintenance, property taxes and mortgage interes

CRA accepts two ways of allocating the expenses>

–          Allocate them based on the number of rooms in the house. If the house has 8 rooms and 2 are rented, allocate 2/8th of the household expenses to the rental units.

–          Allocate the expenses based on the square footage. If the house is 2,000 square feet and the rental is 400 square feet, allocate 400/2000th of the houses expenses to the rental portion.

Rental of your own residence used for your own business

When you are allocated a portion of your principal residence to your own business the same rules of deductibility for expense applies as you are renting the space to someone else.

Tax tip

Do not claim depreciation for the rented part of the house. I will tell you why. Once you claim CCA against your rental income, the part of your home that is rented stops being your principal residence. This means that when you sell your home, part of your proceeds will be taxable because they are no longer exempt under the principal residence exemption.[1]

Rental real estate used for commercial purposes

Rental real estate used for commercial purposes might provide taxpayers with the ability to leverage capital, write-off expenses, earn capital cost allowance (CCA) sheltered rental income, and enjoy capital appreciation on their investment.[2]

For more information you can contact me by e-mail at info@cpa4toronto.com.

 Nicole Dronca


[1] Christie Hendereson, Brian Quinlan, Taxes for Canadians for Dummies, Toronto: CDG Books, pp.125-127

[2] www.cga-ontario.org/assets/file/CGAO_PersonalTaxPlanning-web.pdf