When Do I Need to Report Rental Income?

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.

 

 

 

Why Do Home Builders Need An Accountant?

new home construction accounting

From large corporations to small boutique brands, one universal factor for home builders is that their finances can be quite complex. Most employ accountants or accounting firms but some may not understand how crucial these are in the construction industry. If you are curious why home builders need accountancy services, read on for Liu & Associates guide to this complicated issue.

Real Estate & Construction Accounting

Selling real property and constructing or renovating a property are viewed as distinct industries when it comes to finance. Though they share many fundamentals with general accounting, each makes use of different types of reports and strategies.

Contractors & Temporary Employees

The widespread use of contractors and temporary employees in construction makes its accountancy contrast with other fields. When building or renovating a property, a variety of skilled labourers will likely add to the final project– though very few, if any, will be on-site for the entirety. Construction accounting must accommodate and keep track of each worker and their contribution.

Mobile Industry

Construction involves vehicles, equipment, materials, temporary staff and many other dynamic variables. This can be difficult to manage financially without a reliable construction-focused accountant or accounting firm. With this many moving parts, traditional bookkeeping tends to fall short of the comprehensive understanding provided by construction accounting.

Percentage of Completion

As stated above, construction projects require input and effort from many different employees or contractors. The value each contributes must be determined against the final estimate– also known as “percentage of completion.” A good construction accountant can avoid expensive missteps and costly errors when determining this essential element.

GST & Home Construction

Most Canadians know that Goods and Services Tax (GST) is applied to all transactions and construction is no exception! There are intricate rules that determine whether or not you are responsible for the GST. Building, renovating, buying, selling– the definitions and GST responsibility vary between each of these situations. Construction accountants can help decode these complexities and avoid harsh fines or penalties.

As you can see, there are many areas where an accountant specialized in construction can help a home builder navigate the financial waters. Ignoring or forgetting these factors can be extremely expensive, so contact or visit Liu & Associates today! Our firm has years of professional expertise that can aid you, no matter your goals or industry.

Tax Implications of Rental Properties

rental properties and their tax implications

Owning a separate rental property or renting out a space in your home can be a great way to make some additional income; however, it’s important you understand the tax implications that surround this type of endeavor. Read on for Liu & Associate’s guide to rental properties, taxes and more!

Claiming Rental Income

Regardless of the type of property you are renting (a room, your basement, a separate property), you must report all rental income to the CRA on a yearly basis. You’ll need to fill out a T776 – Statement of Real Estate Rentals form, which will allow you to claim the rent received from any tenants, as well as give you a space to claim expenses.

Claiming Expenses

If you’re renting out your principal residence (aka, the place you live in), you can claim a certain percentage of the household expenses. The amount you can claim is based off the size of the rental suite. If your basement suite takes up 25% of your home, you can claim 25% of your household expenses. Claimable expenses are things like heat, water, power, home insurance, etc.

Claiming Capital Cost Allowance (CCA)

This is where things can get a bit tricky, because there are a couple routes you can take. When performing long-term renovations on a rental property, such as installing a new roof, you can claim something called capital cost allowance (CCA). Claiming CCA gives you a tax break in the short term, but means that you will have to pay capital gains when you decide to sell your home.

If you decide not to claim CCA, you won’t receive any depreciation on your renovation, but you also do not have to pay capital gains when you sell your house. Whether or not you decide to claim any CCA will depend on your own unique situation. It’s best to chat with an accountant to see what’s best for you!

Questions?

If you have a rental property and have questions about your taxes, give the team at Liu & Associates a call! Our expert accountants will ensure you’re getting the maximum return, while making informed recommendations that will benefit you in the long run.

What Is The Best Way To Leave a Property In Your Will

Family leaning against fenceVacations at the family cottage is a cherished tradition, and so it would make sense that you would want to pass it on for generations to come. However, passing a vacation property on to your children can have tax consequences for you & your heirs which could make the inheriting the family cottage a burden, not a gift. Read on to learn some tax strategies for passing on your vacation property.

Sell Now or Inherit Later?

It’s a persistent rumour that selling your cottage to your children instead of waiting for them to inherit it can mitigate their tax burden. Or, perhaps that selling an even a 50% stake in the property to your children can lessen the tax burden when it comes time to inherit the rest.

This isn’t necessarily true.  Whether you sell your cottage to your children now or they inherit it later, they will still incur the same tax burden, the only difference is the timing. The taxes are based on the deemed capital gain – calculated by subtracting the original sale price from the current Fair Market Value plus any renovations made to the property. Whether you sell now or inherit later, paying taxes on transferring ownership family cottage will be inevitable.

Cover Your Bases

So, is there any way to mitigate the tax burden?

  • Life Insurance: It may make sense to some to purchase life insurance to cover the taxes, however there are several downsides. It may be difficult to guess what the taxes will be early enough to buy a sufficient policy, or waiting until later in life when you have a better idea may risk your ability to purchase the policy to begin with. Finally, the cost of the premiums for the insurance policy may outweigh the benefits and could have been more productive invested elsewhere.
  • Gift or Sale: It’s possible to gift or sell the property to your heirs at a more opportune time, before it has increased in value significantly can reduce the tax burden on your children. However, should the property increase in value after the sale, the tax burden will be passed on the the next generation.

Other options include transferring the property to a trust or corporation. Interested in finding out more? Contact the Tax Planning professionals at Liu & Associates to discuss your options.

Income Tax Guide For Landlords

If you’re a landlord, then you know that tax season typically looks a little different for you than it does for those without income properties. While filing your taxes as a landlord may at first seem overwhelming, rest assured that there are straightforward ways to reduce confusion when completing your paperwork.

The most important method of managing your taxes is to learn more about landlords’ tax responsibilities and the overall filing process. Through this knowledge, you will feel more empowered to ask questions, get support and confidently complete your tax forms.

Understanding your income

Before you file your taxes for rent payments you’ve received, it is essential that you know the ins and outs of what qualifies as rental or business income. Canadian law differentiates between housing that provides simple living quarters and businesses that provide a wide range of services.

If your responsibilities as a landlord start and end with providing tenants with a safe and lawful place to reside, then resident payments will most likely be considered as rental income. Conversely, if you are providing tenants with other offerings such as cleaning, landscaping, security or administrative support, then your income will typically be considered as stemming from a business. Knowing the proper classification of your income type is critical, because it sets the foundation for the rest of the tax paperwork you must complete.

Keeping track of your expenses

There are countless types of expenses that landlords must face each year in order to maintain their property and provide a safe and comfortable dwelling for tenants. Because these expenses can add up so quickly—and just as easily be forgotten—it is in your best interest to keep a detailed record of all expenses pertaining to your property.

Expenses can include costs of onsite repairs, gas used to go to and from your building for maintenance or business-related purposes and even legal fees used to draft contracts and lease agreements. Keeping tabs on all property-related costs will increase the ease and speed in which you file your taxes each year.

Utilizing appropriate deductions

There are many tax deductions available for landlords who receive income from a rental property. While some deductions are common and easily recognizable, such as building repairs or home office expenses, others are not so straightforward. If you are a landlord, you may also be eligible for deductions related to interest on mortgage payments and loans, business-related travel, contractor payments and insurance payments made for your rental property. Additionally, you may be eligible for a deduction if your property recently decreased in value, or if you suffered property damage from a fire or break-in. Becoming familiar with the range of deductions available to you will help you secure an appropriate tax refund.

Through these simple steps, you will be on your way to filing accurate taxes that properly reflect your income. For additional guidance on how to file taxes as a landlord, consult with Liu & Associates today.

Tax Deductions For Homeowners

keys-in-a-deadbolt

While owning a home is one of the best investments you can make, it is still an expensive endeavour. The Canada Revenue Agency has tried to make this easier on Canadians by offering several tax deductions specifically for homeowners. Whether you’re a first time homeowner or you’ve owned your home for years, make sure you don’t miss out on these great tax deduction opportunities:

First-time home buyer’s tax credit

This tax credit of up to $750 is only available for first-time home buyers, and is based on a percentage of $5,000.

Renovations for mobility purposes

Persons with mobility impairments can claim expenses for renovations that make their home more accessible.

New home rebate

If your new home cost less than $450,000 (or you did extensive home renovations) you may be able to claim the GST. There is a similar rebate for anyone who bought, built or renovated a rental property.

Home Buyer’s Plan

This rebate allows you to withdraw up to $25,000 from your RRSP to help purchase a new home.  You can then take up to 15 years to pay it back, penalty free.

Rental income

If you rent out a property that you own, you can claim certain expenses such as insurance, advertising or interest on money used to purchase or renovate the property.

Working from home

If you work from home you may be able to claim expenses such as home insurance, electricity or heating.

There are also several tax deductions specific to the province of residence. Home-ownership is a sound investment, but don’t overlook something that can earn you even more value. Contact or visit Liu & Associates today and consult with our experts to find out if there are even more deductions that you might be eligible for.