For first-time landlords or rental property investors, when it comes to tax time, it can be daunting to know how whether or not this additional income is taxable and what’s deductible and what isn’t. So, here are some tips to understanding Canadian rental income tax.
Is it a rental income or a business income?
The Canada Revenue Agency (CRA) distinguishes rental and business income based on the services you provide. So, if you rent out a property that includes basic services like utilities, cable, parking and general maintenance, you are considered to have rental income.
However, if you offer your renters a ton of other services like security, cleaning and cooking meals, the CRA views this as a business and you must file your taxes as a small business owner.
What’s the timeframe for reporting rental income?
Any rental income earned in the calendar year between January 1 and December 31 must be reported. If you received the cheque for December 2018’s rent in January of 2019, it is still included in your 2018 tax return. Be aware you need to declare all income, so if you permitted a sublease, that needs to be included as well.
How do you calculate your rental income?
For most people, the CRA recommends using the accrual method which means that you report rental income for the year in which you earn it, no matter when you received it. You also deduct any expenses for that same fiscal period, whether or not you paid them. However, you can use a cash method if you have almost no amounts receivable and no expenses outstanding. This method is only to be used in situations where your net income or loss would be almost the same as using the accrual method. You can learn more at the CRA’s website here.
What can you deduct?
You’re permitted to deduct expenses used in the maintenance of your rental property. These expenses include:
- Property taxes
- Insurance
- Depreciation
- Utilities (electricity, gas, oil, etc.)
- Cable/internet
- Repairs and maintenance
- Advertising
- Interest and bank charges
- Accounting and legal fees
- Office rental and office supplies
If you use your car to show your property you can deduct vehicle expenses, but be sure to keep a record of the mileage used for property rental business purposes. And, if you have employees, then salaries, wages and benefits can be deducted. If you have an uncollectible debt, you can also claim this against your gross income, but you will need proof that the tenant has been pursued for payment without success.
If your rental expenses exceed your gross rental income, you have incurred a loss.
What happens if you share ownership of the rental property?
If you co-own the rental property with a spouse or business partner, you are expected to report any income or loss proportionate to your share of ownership. Unless you buy a larger share of the rental property, this percentage should remain the same year after year.
How can you keep your records in order?
Property management software helps landlords collect rent and track expenses. It makes it easy to pull records of rental receipts within any given time as well as itemize costs relating to maintenance, utilities, office expenses and so on. Check out pricing and arrange a demo for our tenant management software solution.
