Claiming Rental Income

Posted by Steve Harmer on Monday, February 22nd, 2016 at 10:32am.

Renting property can be a lucrative way to make money but make sure you know the rules..

In Toronto, in 2012, apartments rented for approximately $25 to $35 per square meter, and in Montreal, $21 to $28 per square meter, according to Global Property Guide. However, rental income can also be as simple as renting the spare room in your personal residence. “Even if you’re renting your basement apartment to a student, this is considered rental income, and it must be declared,” Caroline Thompson, president of Thompson Accounting and Tax Inc., explains. “However, you don’t need to charge the goods and services tax. It only applies to commercial property.”

Share of Ownership

Before you can determine how much of the rental income to declare, you need to know how much of the property you own. If you are the sole owner, Canada Revenue Agency considers you to be the only owner, and you declare all of the income. If you and your spouse, common-law partner, friend or other person own the rental property, CRA considers you to be co-owners. As co-owners, you declare a portion of the rent as decided in a written or verbal agreement between the owners. Once co-ownership is established, you need to determine if a partnership exists between you and the other owner. CRA describes a partnership as “a relationship between two or more people carrying on a business, with or without a written agreement, to make a profit. If there is no business in common, there is no partnership.” If you have a partnership with a co-owner of a rental property, you must include a slip T5013, Statement of Partnership Income with your tax return if your revenue and expenses exceed $2 million or there is $5 million in assets; the partnership is a tiered partnership or corporation; or the CRA asks you to provide one.

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Determining Expenses

To claim expenses against your rental income, you need to determine if the expense is a current expense or a capital one. A current expense is defined as one that happens over a short period of time, such as repairing a walk or painting a room. A capital expense has a lasting benefit to the property, such as paving the driveway or putting in a pool. The CRA website provides a chart that you can follow to determine if your expenses are current or capital.

Losses

If your rental expenses are more than your rental income, you have a rental loss. This loss can be deducted from your rental income as well as any other source of income you may have. Unpaid rent also is considered a rental loss. All or a portion of the unpaid or uncollected rent must be owing at the end of your tax year, be part of your declared income for the current or a previous tax year, and be uncollected during the current year. CRA requires that you provide proof that you were unable to collect the rent. This can be by way of a letter from the tenant refusing to pay, notice to creditors from a bankruptcy trustee or proof that you tried to collect the rent without success. If you collect the bad debt in a following year, it needs to be claimed in that year as income.

Accounting

There are two methods you can use to claim rental income: the accrual method and the cash method. The cash method is used if you have no, or a small amount receivable and no expenses at the end of the tax year. Using the cash method, you claim the rental income and expense deductions in the year they were earned and paid. The accrual method requires that you claim rental income and expenses in the year they were due or payable whether you collected them or paid them in that year.