If you’re a landlord, it’s important to understand how to file your rental income come tax time. Whether you’re renting out a basement apartment or an investment property, you’ll need to report your rental income. This is done by completing Form T776, Statement of Real Estate Rentals.
If you’re filing your own income tax, you’ll need to fully understand the form to properly file your taxes; the last thing you want to do is get audited by Canada Revenue Agency (CRA).
Tax Treatment of Rental Income
Similar to income earned from self-employment, you’ll need to report rental income earned in a calendar year. If you work a regular 9 to 5 job, you’re probably used to taxes being deducted at source by your employer. However, since taxes aren’t deducted from each rent cheque received from your tenants, you’ll need to pay your fair share of taxes come April 30th. The advantage of rental income is that you’re able to write off a percentage of the expenses related to your rental property.
Completing Form T776, Statement of Real Estate Rentals
If you’re the sole owner of a rental property, completing the first part of Form T776 is pretty straight forward. After you’ve completed your basic personal information, you’ll start by entering your gross rents under the income section. For example, if you receive rental income of $700 per month for your basement apartment from January to December, your gross rental income for the year would be $8,400.
Claiming Your Expenses
The next section of the form is for claiming your expenses related to your rental property. Expenses are claimed on a cash basis (not an accrual basis). That means your expenses are claimed when you actually paid for them. For example, if you paid your hydro bill in December 15, 2012, you’d claim the expense on your 2012 income tax return, but if you paid your water bill on January 25, 2013, you’d wait until your 2013 income tax return to claim it.
Before completing your expenses, it’s important to understand there are two columns you’ll need to complete: total expenses and personal portion. If you have a rental property that’s 100% rented out to tenants you won’t have any personal portion, but if you live in your principal residence and rent out the basement, you’ll need to enter your total expenses for the year and allocate the amount for your personal portion. You can estimate the percentage of your house rented out. For example, if you rent out the basement in a bungalow, it’s probably reasonable to claim 50% to 60% as personal.
Here are the most common expenses you’ll claim:
- Advertising – For example, if you put an advertisement in the local newspaper to attract tenants, you can claim 100% of the expense.
- Insurance – This is for home insurance paid on your property.
- Interest – You can claim mortgage interest (not principal) paid.
- Property Taxes – Even if your property taxes were prepaid by the seller when you purchased your house, you can claim a portion here.
- Utilities – Heat, hydro, water, etc.
Maintenance and Repairs vs. Capital Cost Allowance (CCA)
It’s important to understand whether an expense is current or capital. Canada Revenue Agency’s (CRA) website has a helpful questionnaire to determine where an expense should fall under.
According to CRA, renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses. For example, painting your rental unit is probably considered current and should be claimed under maintenance and repairs, since it’s an expense that usually recurs after a short period. Meanwhile, a capital expense generally gives a lasting benefit, such as reroofing your house. Another important decision is whether to claim CCA at all. Although claiming CCA reduces your taxable income for that year, when you sell your property previous CCA claims will be recaptured and taxed accordingly. Here is more information on how capital cost allowance works.
Once you’ve entered your expenses, at the bottom of the form is your net income (or loss). This final amount is reported on line 126 of your income tax and benefit return. Once you’ve completed the form the first time you’ll get the hang of it. As long as you keep your receipts and bills organized, you should have no problem filing your rental income taxes every year.
About the Author: Sean Cooper is a single, 20-something year old, first time home buyer located in Toronto. He has experience in the financial sector as a Pension Analyst, RESP administrator and Income Tax Preparer. He holds a Bachelor of Commerce in business management from Ryerson University. You can read some of his other articles here.