What do you claim? Rental income or business income?
When you earn income from rents for a home, apartment, apartment or other property, you will use Form T776 to report total and net income on the T1 tax return (Real Estate Lease Statement). However, if you are considered a “business” rather than owning an asset “from property income”, you can sometimes use T2125 (Business Revenue and Expenditure Statement).
Which one should you claim? This is a thin line.
Overall, though, the more services you provide (board and accommodation, safety and cleaning services, etc.), the more likely you are to be in the “business”. Also, if you only provide basic services such as heating, light, parking and laundry facilities, you will report rental income instead of business income.
What are the rules for the main residence?
The main residence is where you live – you call it home. When you rent out a portion of your main residence, there are important rules to follow. If there is no expectation for profit (for example, you are renting out to an 18-year-old and starting to contribute to the room and the board), there is no need to report income as no loss can be deducted.
However, in the case of profit potential, tax reports are required because you are charging fair market prices for rent. For example, this could happen if you rent a basement suite to a college student. I covered other tax traps for the main resident tenants below.
Keep it simple: Report income from rent using calendar year
Business owners can choose non-principal financial deadlines to report their business revenue. The owner of the leased property must report their net rental income in the calendar year (January to December). In the first year of rent, income and expenses are reported only during the lease period.
Rental income retirement plan
It is important to know that net rental income (rental minus rental expenses) is indeed eligible as income income in order to contribute to the Registered Retirement Savings Plan (RRSP). However, unless the Canadian Income Agency (CRA) reclassifies income as business income, net rental income will not be eligible for the purpose of the Canadian Pension Plan (CPP) contribution. Please note that “net business income” is also “earned income” to make RRSP contributions.
Your income tax return deducts income from a leased property?
Accounting and attorney fees, advertising for residential renters, cost of capital allowances (deductions used for depreciation of commercial assets), internal offices, insurance, interest, property taxes, utilities, maintenance and repairs, and in some cases can claim travel expenses. Many of these costs have special nuances. So, contact your accountant to make sure you can ask for deductions for the leased property.
