Own a Rental Property? Claim Your Deductible Expenses

Evelyn Jacks

Real estate investments have been all over the news with the announcement of several new tax provisions recently.  One of these concerns residential property offered on platforms such as Airbnb or VRBO as a short term rental.   Expenses normally deductible in reducing rental income will be denied effective January 1, 2024 if the property is not in compliance with provincial or municipal laws.  That naturally leads to an important question: what is deductible if the properties fall in line with the law?  Here’s what you need to know:

Reporting the income.  Income resulting from the rental of a home, apartment, condo, mobile home, etc., is reported on line 12600 of the tax return.  The detail goes on Form T776 Statement of Real Estate Rentals.

Future Planning for Capital Gains.  It’s important to get the ownership structure right. For example, if both spouses are partners in this venture, each should report 50% of the net income (gross income minus allowable expenses).  This is particularly important down the line when it comes to a disposition of the property.  Assuming this is not a principal residence and any gain is taxable, each spouse will be able to use their $250,000 capital gains threshold under which only 50% of capital gains are included in income.  Over this threshold, the gains are included in income at 66 2/3%. 

Reporting Period.  Net rental income must be reported on a calendar year basis; that’s different from a business venture which may elect a different fiscal year end. Here are additional differentiators between a rental and a business venture:

Deductible Rental Expenses.  Most reasonable expenses to earn rental income will be deductible in the year paid. However, some exceptions apply:

• .  Expense amounts must be matched to the rental income. For example, if the taxpayer pays insurance in advance, only that portion of the insurance that relates to the rental period may be deducted.
•   Expenditures that improve the property beyond its original condition or the addition of new appliances or equipment are considered to be capital expenditures and must be deducted over the life of the asset created using the Capital Cost Allowance deductions.  They cannot be written off in full unless they are repairs (ie. Shingles are replaced after a hail storm; vs a new roof is added to the building.  The former is fully deductible; the latter must be claimed under the CCA provisions.

Home Office Expenses.  Reasonable home office expenses may be claimed against rental income.  But here too there are some rules to observe.  First, when a home office is in a shared workspace, the expenses must be prorated on the basis of the area of the workspace to the area of the home and hours used to earn income per week to total hours in the week. But interestingly, the rules that limit the claiming of home office expenses to the amount of business income reported, do not apply to rental income.  In this case  you can create a rental loss with this claim.

Interest.  Interest paid on a mortgage to purchase the property plus any interest on additional loans to improve the rental property may be deducted against rental income. But if the mortgage funds are used for another investment, they may be deductible as carrying charges instead.

Some more obscure rules:   Other charges relating to the acquisition of a mortgage are not deductible in the year paid but must be amortized (under S. 20(1)(e)) over a five-year period starting at the time they were incurred.  In addition, if the interest costs relate to the acquisition of depreciable property, the taxpayer may elect under S. 21(1) to add the interest to the capital cost of the asset rather than deduct it in the year paid.

Motor Vehicle Expenses.  These rules are obscure as well.  If the taxpayer owns only one rental property, then motor vehicle expenses to collect rent are not deductible. CRA considers these to be personal expenses. However, if the taxpayer personally makes repairs to the property, then, specifically, the cost of transporting tools and materials to the property may be deducted.

These rules change if the taxpayer owns rental properties at two or more sites away from the taxpayer's place of residence.   In this case the CRA will allow motor vehicle costs to be deductible if incurred to collect rent, supervise repairs or otherwise manage the properties.

CPP.  Net profit from rental income does not qualify for Canada Pension Plan contribution purposes, as business income would.

Capital Cost Allowance (CCA) may be taken on capital assets related to a rental property, similar to a business property. The maximum CCA claim is subject to the regular CCA rules. But there is a restriction on the maximum CCA claim on rental properties. A rental loss cannot be created nor increased by claiming CCA on rental assets.

This rule applies collectively to all rental properties owned by the taxpayer so that a taxpayer who has net rental income remaining after CCA on one property may claim CCA on another property to create a loss on that property,  so long as there is no net rental loss on the properties collectively.

Bottom Line:  It pays to learn about tax compliance when it comes to rental properties.  Depending on the circumstance, rental expenses may be fully deductible, partially deductible or not deductible at all.  See a tax specialist for help, especially in the first year of a rental enterprise or when owning a property together with a spouse or partner.