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Before making a major financial decision you
should consult a qualified professional.
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. 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.
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.
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.
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
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.
A change in use of your home from personal residence to rental property, or
from rental property to personal residence, 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.
Net rental income or loss is reported on line 126 of
your personal tax return. This net income is included in "earned
income" for purposes of calculating your allowable RRSP deduction limit
for the following year. 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.
General rules regarding whether
an item should be capitalized (capital expense) or can be expensed (current
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
When a property has just been acquired, usually any costs
incurred in order to get the property into usable condition would be
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
Determine if the expense provides a lasting
If it provides a lasting benefit, or
extends the useful life of the property, it is capitalized.
Example: putting vinyl siding on the exterior of a wooden or
If the expense recurs after a short period
of time, it is expensed. Example: painting the interior or
exterior of a house.
Determine if the expense maintains the
property, or improves the property.
If the property is repaired and improved
to better than its original condition (when it was new), then the
expense is capitalized. Example: replacing wooden steps with
If the property is merely restored to its
original condition, the cost is expensed in the current period.
Example: replacing a worn-out roof with a roof of similar
Determine if the expenses are for a part of
the property, or are they separate from the property.
For replacement of assets that are
separate from the building, the cost would normally be
capitalized. Examples: refrigerators, stoves, compressors.
When replacing an asset that is part of
the building, the cost would normally be expensed. Examples:
wiring, plumbing, hot water tanks.
If you cannot determine from the above whether
the cost is a capital or current expense, consider the value of the
If they are of considerable value in
relation to the value of the property, they are probably capital
expenses. However, if they are of considerable value because
needed regular maintenance has not been done over a long period of time,
the value would not necessary make these costs capital in nature.
If they are not of considerable value in
relation to the value of the property, and are costs for ordinary
maintenance, they are most likely current expenses.
Unfortunately, sometimes it is
difficult to determine if a cost should be capitalized or expensed, but the
above guidelines will hopefully help you.
Canada Revenue Agency (CRA) has a
Income Tax Guide (T4036) which goes into detail about deductible
capital cost allowance, deemed dispositions, splitting of expenses between
personal areas and rental areas, and most issues regarding
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.