What Are the Rules to Reporting Rental Income?

With a new school year around the corner, you may be considering taking in a university student as a renter. If so, you will want to get your documentation ready for a change in your tax filing.

Your tax software will do a great job helping you calculate the numbers you enter, but you’ll need to keep your rental agreement on file, as well as back up for retrieval at tax time: income record, expenses and your valuation of the property when you changed its use from personal rental.

Look for Form T776 Statement of Rental Income. You can use this as a printed checklist behind which to attach your receipts.

Here are some basic rules for reporting your rental income:

• Use a calendar year. Income and expenses will be reported on a calendar year basis. Accrual accounting (report income when receivable and expenses when payable) is supposed to be used but administratively CRA will accept cash basis accounting for most individuals so long as the cash income reporting does not differ significantly from the accrual basis.
   
• Report gross rental income. Do open a separate bank account for your rental income and expense transactions.
   
• Charge rent at FMV. You may not be able to write off losses if you can’t justify that you are charging rent at fair market value. Take newspaper clippings and other proof of rentals in the area and add to your permanent records so you can make a case for what you are charging, especially if you’re renting to a related person.
   
• Record income reporting. Advance payments of rent can be included in income according to the years they relate to. Lease cancellation payments received are also included in rental income.
   
• Record expense reporting. To deduct operating expenses from rental income, there must be a reasonable expectation of profit on an annual basis. Fully deductible operating expenses include maintenance, repairs, supplies, interest, taxes. Partially deductible expenses could include the business portion of auto expenses and meal and entertainment expenses incurred. But this is where many tax filers make mistakes. Take note of these traps:
  • Trap #1: Maintenance and repairs are 100% deductible; improvements over the original condition or that extend the useful life of the asset are added to cost base because they are capital in nature. Put those expenses on the Capital Cost Allowance (CCA) statements instead.
     
  • Trap #2: Land is not a depreciable asset. Separate the cost of the land from the cost of the buildings for the purpose of your CCA statement.
     
  • Trap #3: The deduction for CCA is always taken at your option so if your assets, particularly the building, are appreciating in value rather than depreciating, you may wish to forego the claim to avoid Recapture in income later.
     
  • Trap #4: CCA deductions cannot be used to create or increase a rental loss. This rule is applied to all rental properties you may have together. Thus, if you have more than one property, CCA may be claimed to create a loss on one property so long as you do not have a rental loss on all properties combined.
     
  • Trap #5: Don’t claim auto expenses for visits to collect rents if you own only one rental property. However, if you personally do the maintenance and repairs for a nearby property, and use your car to carry the tools to do so, the claim will be allowed.
     
  • Trap #6: Don’t deduct any personal living expenses.
     
  • Trap #7: Family member rentals may be exempt. If you are renting to your youngest son, Charlie, for the cost of the groceries, there is no expectation of profit. Don’t expect to be able to deduct a rental loss against other income, but in this case, unless there is a demonstrable profit motive, you don’t need to report the income, either.

Excerpted from Jacks on Tax. © Knowledge Bureau, Inc. All rights reserved.