How to Prepare Rental Income Tax Return

Rental Income Tax Return
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Rental Income Tax Return

Rental income is an income you earn from renting a property you own. Rental income is a great source of secondary income and helpful to pay extra bills. However, under the Income Tax Act rental income is taxable must be included on your income tax return. For the purpose of this article, I will not go into such details; as rental income vs business income, active income vs. passive income and the GST implications.

This article is designed for home owners who rent a port of their house. One of the mistakes tax payers do when they prepare their own taxes without professional help; is to claim major repairs and maintenance expenses, without realizing the difference between the nature current and the capital expenses. Due to this oversight many tax payers get audited by CRA every year.

Current expenses are recurring expenses that provide a short-term benefit. For example, a current expense is the cost of repairs you make to keep a rental property in the same condition as it was when you acquired it. You can deduct current expenses from your gross rental income in the year you incur them. As for capital expenses, they provide a benefit that usually lasts for several years. For example, costs to buy or improve your property are capital expenses. Generally, you cannot deduct the full amount of these expenses in the year you incur them. Instead, you can deduct their cost over a period of several years as capital cost allowance (CCA). Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually capital expenses. However, it is not advisable to claim CCA on your principal residence. See your tax advisor before you claim CCA.

If you rent part of the building where you live, you can claim the amount of your expenses that relate to the rented part of the building. You have to divide the expenses that relate to the whole property between your personal part and the rented part.

If you pay for repairs to your property, you can deduct the cost of labour and materials. However, you cannot deduct the value of your own labour. You can deduct the cost of landscaping the grounds around your rental property only in the year you paid the cost, even if you use the accrual method for calculating your rental income.

You have a rental loss if your rental expenses are more than your gross rental income. If you incur the expenses to earn income, you can deduct your rental loss against your other sources of income. If you lose money because you rent a property to a person you know for less money than you would to a person you don’t know, you cannot claim a rental loss.

Every year CRA send out letters to tax payers who have rental properties and are claiming rental loss year over year. These educational letters are being mailed to individuals in selected activity groups where taxpayers are at risk of misunderstanding their tax obligations.

There are two types of educational letters the CRA might send to selected taxpayers: one to educate them about specific claims made on their returns, and another to educate and notify them that the CRA may conduct an audit in their activity group. In recent years, CRA has mailed out thousands of letters to selected taxpayers.

* contents of this article are taken from Canada Revenue Agency website. The information provided is a general overview and should not be constructed as tax advise. We recommend seeking professional advise from your tax advisor in respect of your specific situation.  

For a personal tax consultation and other tax matters contact us.

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Nafees Chaudhry

Nafees Chaudhry

Nafees Chaudhry is the founder of CNC. Providing accounting, tax, and consulting services to small businesses and individuals for 23+ years.

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