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Property Rental Issues / Expenses
Renting Below Fair Market Value
Are Your Rentals Property Income or Business Income?
Denial of Expenses for Non-Compliant Short-Term Rentals - new for 2024
Renting Only a Portion of Your Home
Capital vs Expense for Rental Costs
Taxes on Real Estate in Canada - Property Taxes, Vacancy Taxes, Underused Housing Taxes
Canada Revenue Agency (CRA) Resources
Renting Below Fair Market Value
To quote Canada Revenue Agency, Expenses are only deductible when incurred in order to earn income. The example they use is a cost-sharing arrangement with a non-arm's length person, which would not be applicable if you were renting out a house.
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 loss. However, the income and expenses should be reported, but no loss should be claimed.
See the Canada Revenue information Renting below fair market value.
Rental Losses
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.
Are Your Rentals Property Income or Business Income?
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.
Denial of Expenses for Non-Compliant Short-Term Rentals
The 2023 Federal Fall Economic Statement proposes to deny expense deductions for expenses incurred to earn short-term rental income, including interest expenses,
 | in provinces and municipalities that have prohibited short-term rentals, or |
| when short-term rental operators are not compliant with the applicable provincial or municipal licensing, permitting or registration requirements. |
This is proposed to be applicable to deny all expenses incurred on or after January 1, 2024. However, if the short-term rental becomes compliant, the denial of expenses will be prorated so that only the expenses related to the non-compliant days are denied.
Proposed Federal legislation, s. 67.7 of the Income Tax Act, defines a short-term rental for income tax purposes as "a residential property that is offered for rent for a period of less than 90 consecutive days". The following are included in the definition of residential property: all or any part of
| a house, |
| apartment, |
| condominium unit, |
| cottage, |
| mobile home, |
| trailer, |
| houseboat, or |
| other property located in Canada, |
the use of which is permitted for residential purposes under applicable law.
See Feds slap punitive tax measure on non-compliant short-term rentals by Jeff Buckstein, CPA, CGA, on the CPA Canada website.
See Short-Term Rentals in the January 2024 Explanatory Notes to Legislative Proposals Relating to the Income Tax Act.
December 2023 Draft Legislation Explanatory Notes re Short-Term Rentals
| proposal to deny income tax deductions for expenses to earn short-term
rental income, including interest expenses,
| ||||
| applicable to deny all expenses incurred on or after January 1, 2024. | ||||
| See Supporting Renters, Buyers, and Homeowners in the 2023 Fall Economic Statement |
Complications of the short-term rental "crackdown" proposal
| See articles on LinkedIn by Peter Mitchell, CPA practicing indirect tax (GST/HST,
customs and other sales taxes)
| ||||
| See article by Kim Moody, founder of Moody's Private Client / Moody Tax Canada's housing woes won't be solved by attaching perceived evils through the tax system. |
Deductible Rental Expenses
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
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.
Renting Only a Portion of Your Home
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.
Change in Use of Your Home
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.
Capital vs Expense for Rental Costs
General rules regarding whether an item should be capitalized (capital expense) or can be expensed (current expense):
| When a cost is incurred to acquire a new asset, not as a replacement for a failed asset, and the asset is of an "enduring nature" (i.e., will not have to be regularly replaced), the cost is capitalized. |
| If a repair is incurred in order to resell the property, this is not deductible as an expense, and must be capitalized. This is true even if this type of repair would normally be expensed. |
| When a property has just been acquired, usually any costs incurred in order to get the property into usable condition would be capitalized. |
| When a repair is incurred in order to acquire a new tenant this would normally be expensed, not capitalized. |
| When a repair is required due to wear and tear, the cost is normally deductible as an expense. |
| When fixtures such as toilets and sinks, i.e., things that become a part of the building once installed, are replaced due to normal wear and tear, this would normally be a deductible expense. However, if these things are replaced in order to upgrade to something of better quality or performance, not because of wear and tear, this would normally be capitalized. |
CRA indicates the following criteria should be used when determining if an expense is a capital expense or a current expense:
| Determine if the expense provides a lasting
benefit.
| ||||
| Determine if the expense maintains the
property, or improves the property.
| ||||
| Determine if the expenses are for a part of
the property, or are they separate from the property.
| ||||
| If you cannot determine from the above whether
the cost is a capital or current expense, consider the value of the
expenses.
|
Unfortunately, sometimes it is difficult to determine if a cost should be capitalized or expensed, but the above guidelines will hopefully help you.
Motor Vehicle Expenses
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:
| collect rents; |
| supervise repairs; and |
| generally manage the properties. |
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.
Foreign Rental Property
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.
TaxTips.ca Resources
See all our articles related to Property Rentals.
Canada Revenue Agency (CRA) Resources
Reporting real estate income and expenses
Form T776 Statement of Real Estate 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: September 20, 2024