What do you claim? Rental income or business income?
When you earn income from the rental of a home, apartment, condo or other property, you will report both gross and net income on the T1 tax return using Form T776 (Statement of Real Estate Rentals). But, sometimes the T2125 (Statement of Business Income and Expenses) can be used if you are considered to be “in business” as opposed to owning an asset from which you derive “income from property.”
Which one should you claim? It’s a fine line.
In general, though, the more services provided (board and lodging, security and cleaning services, and so on), the more likely it is that you’re in “business.” Alternatively, if you provide only basic services like heat, light, parking and laundry facilities, you’re reporting rental income rather than business income.
What are the rules for principal residences?
Principal residence is the place you live—what you call home. There are important rules to follow when you rent out a part of your principal residence. If there’s no expectation of profit—say you rent to your child who turns 18 and starts to contribute to room and board—then there’s no need to report the income, as any losses are not going to be deductible.
However, where there’s a potential for profit, tax reporting is required, because you’re charging fair market prices for the rental. This may happen if you rent out a basement suite to a university student for example. I cover other tax traps for principal residence renters below.
Keep it simple: Use the calendar year to report the income from rent
Business owners can choose a non-calendar fiscal period to report their business income. Rental property owners must report their net rental income on a calendar year basis—January to December—each year. In the first year of rental, income and expenses are reported only for the rental period.
Retirement planning with rental income
It’s important to know that net rental income (rental income minus rental expenses) does qualify as earned income for the purposes of making a contribution to a registered retirement savings plan (RRSP). However, net rental income will not qualify for the purposes of making Canada Pension Plan (CPP) contributions, unless the income is reclassified as business income by the Canada Revenue Agency (CRA). Note that “net business income” is also “earned income” for the purposes of making an RRSP contribution.
What’s deductible for your income tax return with income from a rental property?
Accounting and legal fees, advertising for residential renters, capital cost allowances (a deduction calculated for the depreciation of business assets), home office, insurance, interest, property taxes, utilities, maintenance and repairs and in some cases travel expenses are claimable. Many of these expenses come with special nuances. So, check with your accountant to be sure what you can claim as a deductible for your rental property.
