If you own a rental property or rental part of the house, you must report the rental income that you have received in your tax return.
Your tax return will require you to fill up the Statement of Real Estate Rentals schedule T776.
The T776 tax schedule asks for the address of the property, units rented, the rental income generated from the property and the expenses incurred to keep the property operational.
In the Statement of Real Estate Rentals schedule, you will deduct all of your expenses from your gross rental income. The rental income remaining (if any) is what you pay tax on.
The rent collected from the property is your gross rental income.
The expenses can simply be explained as costs incurred to keep the rental property in business.
The expenses are broken down into 2 categories.
1) Non-Capital Expenditures
2) Capital Expenditures
Non-capital expenditures are deducted from your rental income in full in the year they occurred and reduce your overall tax burden.
Typical expenses for a rental property in Canada are: Property insurance, mortgage interest (only the interest), advertising, legal fees, accounting fees, property manager wages, repairs, property taxes, utilities, supplies and vehicle expenses (only if you meet some specific criteria).
Capital expenditures are expenses that provide a benefit or advantage over multiple years. Example, the cost of a new roof or a new backyard deck which is expected to last many years).
Capital expenditures are deducted from your rental income year-over-year, through depreciation, rather than in full in the year they occurred. For a simple explanation, if a new furnace costs $5000 and lasts 10 years, you will get a $500 expense deduction each year ($5000 / 10 years).
In practice, the calculation is different and is driven by Canada Revenue Agency’s (CRA’s) guidelines using the Capital Cost Allowance (CCA) the details of the method used in the tax return is complex and are beyond the scope of this article, so ensure you speak to an accountant before you proceed with filing your personal tax return.
The following are expenditures that are not allowed as eligible tax deductions.
- If you live in the property, your personal portion of the expenses has to be calculated and cannot be deducted
- The principal amount of your mortgage payment
- Land transfer taxes
You should contact a tax professional, if you have any questions regarding this topic or unsure in doing your tax return.
KSF Accounting & Tax Solutions
Nicolas Valcourt, CPA, CMA