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Rental income and taxes

Were you thinking about getting a rental property or renting part of your house for income? This article will go through the basics of renting a property. For more information, visit the CRA website and search for rental income.

The rental income is when you rent out a property to someone else to use it. The property is usually thought to be a property, but it can be anything that can be rented like cars, snow skiing, power tools, computer, etc. The expectation is that there will be profit because if there is no money to make, there will be no taxes due. There is still a requirement to report activity in most cases, but renting is something that generally assumes that money will earn over time.

Rental income versus business income

If you only rent a property, this will be considered rental income. If you provide a service that is compatible with the property and charges for it, this will be considered a business. The classic example of showing difference is Bed and Breakfast. Since there are meals and laundry services that may be provided, this is considered a business rather than just providing a place to stay in the hotel and do cooking and cleaning. If there is an existing job and a rental property is a part associated with it, then the rental will be considered part of the work. For example, if you are making auto parts and renting part of your space temporarily, this rental will be part of auto parts business rather than rental income.

What difference does it make if your business is or not?

The differences between rental income and commercial income are that the rental income transferred to the husband or child can be attributed to the person who transferred it while the income from work does not include this restriction. This means that everyone who pays for the rental property will have to declare income for tax purposes. If you have children who share the profits from renting for a job, this means a difference in who can post income and expenses. Rental income is obtained when the property owner lives, while a work income tax is imposed in the place where the work is located. If you have multiple real estate rental sites or multiple companies with different tax rates, this could mean a higher or lower tax bill depending on where the companies live. Available discounts may vary between rental income and commercial income. There are different rules regarding asset depreciation or the Capital Cost Allowance (CCA) to rent properties instead of companies. Rental income will not be subject to CPP discounts but business revenue will be. The rental period contains a calendar period for the calendar year, but the company can change this to any time during the year. Depending on your circumstances, these differences can save you money or create a larger tax bill.

How can you report rental income?

Rental income is reported on Form T776 – Statement of Rental Income which can be found on the CRA website. This form will be presented with a personal tax return as an additional document. If the rental is part of a company, the template to use is T2125 – Business Activity and Professional Activities Statement which is the business model. This will also be added to your personal tax return as an additional document.

Current expenditures versus capital expenditures

Current and capital expenditures are the money spent during the current tax period. If there are expenses that occur to maintain the property and in the same work order as before the money was spent, then this will be called current expenses. Examples include the costs that occur daily to operate the rental property – such as utilities, insurance, and property taxes. Capital expenditures are money that is spent on something that is expected to last for a period longer than one year, which is either a separate component obtained for the property or an improvement of the property. If the money spent will make the property more valuable or useful compared to otherwise, this will be called a capital account. An example of a separate item would be a kitchen appliance within the rental property. This device is expected to last more than a year, and it can be moved to another part of the house as a separate item, it is used by the tenant, and therefore it represents applicable expenses for deduction. If there are costs incurred to create or obtain a property that is available for rent, these costs will be considered capital expenditures and will be part of the acquisition cost instead of separate expenses. The intention behind the money and condition of the property before and after the calculation is important in determining how to handle the money spent for tax purposes.

Tax treatment of current and capital expenditures

The main difference between current and capital expenditures is the timing of their deduction. Current expenses are deducted in the year in which they occurred completely. Capital expenditures will be deducted over the life of the asset, which usually means a period of years. This means that charges will be deducted more slowly. The spread of the discount over several years is called amortization. This is calculated by knowing the category of the item or expenses, finding the related depreciation rate, then using that as a partial deduction every year until the expenses are fully calculated. For example, if you purchased a device and were a Category 8 item, the associated depreciation rate would be 20% per annum. This means that if you purchase a device at a cost of $ 1,000, you can deduct 20% of $ 1,000 or $ 200 a year.

Depreciation of the property itself

Whether to calculate depreciation on the property itself is a choice to be made by taxpayers. There are advantages and disadvantages of claiming these expenses. The first factor to consider is that consumption on the property cannot be used to create a loss when renting the property. If your property is not profitable, you will not be able to claim a large amount of depreciation even if you wish. The second factor that you have to keep in mind is that if you require a devaluation, you will likely have to pay more taxes later when selling the property. Land and buildings are not undervalued much. When there is a sale, there are usually capital gains that are incurred and a small portion of that profit will be taxed. If you are claiming depreciation along the way before selling, your tax bill will be higher.

Do you use the drug personally?

If you are renting something and using it personally at the same time, the rental part and personal use must be divided in one way or another. This is because anything used for personal reasons will not be deductible or report the tax return, but it will be the rental of the property. If the house is rented, the space will be divided into space for personal use and leasing, and any expenses will be prorated to reflect the amount of expenses that must be allocated to the rental property.

The rules discussed in this article are very general and will apply to most rental situations. For more specific cases and more details, visit the CRA website.