Renting property seems like a lucrative entrepreneurial opportunity as more and more individuals are renting out portions of their home and even offering space through popular accommodation services such as Airbnb.
Acquiring rental income is a great way to offset the cost of a mortgage or justify an investment in a secondary property. However, if you are renting your property to a third party, you are required to report your rental income on your tax return. While it may be tempting to not disclose this income to the CRA (Canada Revenue Agency), not doing so can lead not only to penalties but also missed opportunities for some tax savings.
What is Rental Income?
When it comes to claiming rental income on your taxes, rental income is considered to be any earned income from a rental property you own. This includes houses, apartments, rooms, office space and other real or movable property.
Rental income from Airbnb, income suits and any short term rentals must be claimed as well.
The duration of the rental, whether it be for one night, a week or a month, does not exempt the income from having to be claimed on your income taxes.
Exceptions to Claiming Rental Income
There is one exception to having to claim rental income on your income taxes – if you are renting a space below fair market value.
Renting below fair market value means that you are charging a rent significantly lower than rents charged for other properties that are similar to your property in your area.
Typically, home owners will charge family members below fair market value rent for allowing them to stay in their home.
If this is the case, you do not need to claim the income. However, you cannot claim any rental expenses or rental loss on your taxes.
The government considers this situation to be a “cost-sharing arrangement”.
Claiming Rental Income at Tax Time
If you are in a situation where you rent a property, or a portion of your property, at or above fair market value, the CRA requires that you pay taxes on the income earned.
In order to claim rental income on your tax return, you must declare the net income on line 160 of form T1. From there, you can subtract any qualifying expenses as well as capital expenditure depreciation expenses. The difference is your reported rental income.
Here are some common rental expenses that can be deducted against your rental income:
- Advertising
- Insurance
- Mortgage interest
- Repairs and maintenance
- Property management
- Utilities
To ensure that you are claiming the appropriate expenses for your rental property, contact the expert accountants at Liu & Associates for more information.
What Happens If I Don’t Claim Rental Income?
When the CRA expects you to claim any sort of income on your tax return, not doing so can lead to unpleasant consequences:
- Interest accrual. If you owe taxes on rental income, and fail to report it, the amount can be subject to interest.
- Penalties and fines. The CRA is within their rights to implement penalties for filing your taxes late. This amount is backdated to the time when the rental income should have been reported. Interest is also charged on the penalty amount.
Withholding your rental income from the CRA not only leads to financial consequences, but it also means that you miss out on the valuable deductions listed above.
Avoid the Confusion of Claiming Your Rental Income
Get in touch with the professional accountants at Liu & Associates to find out more information about how to properly claim your rental income as well as all of the tax benefits you can reap by renting out your property.