Being a homeowner is every Canadians dream, and being a landlord is one of the most effective alternative income sources as they tend to generate steady income. However, there are also risks associated with renting, such as the house remaining vacant, delayed rental payments, renovation, and maintenance. If you are a new landlord, note that the Canada Revenue Agency (CRA) requires you to report all income, even rent. The accounting and reporting of rental income is different from your personal income tax return.

How is Rental Income Filing Different from Personal Income Tax Filing

Firstly, the CRA allows landlords to deduct expenses incurred on the rented apartment from their rental income. Some deductible expenses include property tax, mortgage interest, advertising, insurance premiums, utility bills (if paid by the landlord), and more.

Expense deduction: However, not all expenses are tax-deductible, and you have to maintain detailed records of these expenses to safely keep invoices and receipts to prove expenses and claim deductions. While you can do accounting yourself, the tax laws and reporting requirements are complex, and they keep changing. Mistakes in DIY accounting can be expensive if the CRA comes knocking on your door.

Security deposit management: You could also face legal penalties if you do not maintain accurate records of how you handle security deposits. Improper recording of a security deposit could lead to disputes with tenants if you deduct any amount from the deposit.  

Non-resident landlord: If you are a non-resident Canadian landlord, then your Canadian tenant will deduct 25% withholding tax from the rent and pay it to the CRA on your behalf. Your tax liability may not be 25% on net rental income. If you don’t want the tenant to deduct tax, you have to file Form NR6 and pay tax on your rental income. And if the withholding tax is already deducted, you will have to file a Section 216 tax return to claim a tax refund.

Landlords can navigate these complexities of rental income recording and taxation with the help of a skilled accountant.

Common Accounting Mistakes with Rental Income

Wrongly reporting an expense can change your tax calculation. An accountant can help you avoid such costly accounting mistakes. Let’s see how.

• Wrongly Expensing Capital Improvements: As a landlord, you may buy new appliances or spend on renovations to enhance the apartment’s value. These are capital improvements, as they enhance the value of your assets and are done infrequently. An accountant will add capital expense to the property value and depreciate it over time as Capital Cost Allowance (CCA). If you wrongly report such expenses as repairs, you will miss claiming depreciation.
• Failing to Allocate Shared Expenses: Many landlords rent a portion of their house and fail to deduct the shared expenses from rental income. For instance, Janet rents a room in her house, which occupies 20% of the house area. She can deduct 20% of all eligible expenses, such as utility, maintenance, and property tax, from her rental income. An accountant can help with the calculations.
• Wrongly Reporting Short-Term Rent: If you are renting your apartment for a short term, such as on Airbnb, the rules are different. Firstly, your province should allow short-term rentals. Some municipalities even require you to take a license. From 2024 onwards, the CRA disallows deductions for expenses incurred on non-compliant rental units. Secondly, there is confusion about the classification of short-term rental income: rental income or Self-employment income. This classification will determine your goods and services tax/provincial sales tax, tax rates, and deductions.
• Failing to Claim Losses from Rent Income: Many landlords don’t realize they can claim losses on their rental income if the tenant doesn’t pay rent or the property is vacant. Loss will occur because you will bear the recurring expenses whether or not you receive rent. To claim the loss, you need to have valid proof that you tried to collect the rent by sending notices or advertising the property to attract tenants. An accountant can help you claim rental loss in a compliant manner.
• Mistake in Reporting Rental Income in Your Income Tax Filing: The CRA has separate Forms for rental income. You have to fill out Form T776 if you are renting a portion of your primary residence or renting a single property and offering utility, parking, and other basic facilities. You have to fill out Form T2125 if you are renting multiple properties and providing special services, such as meals, as this will be considered business income. There are also rules around when to recognize rent, when it is accrued, and when it is paid.

Is it Better to Claim Expenses on Rental Income?

While claiming expenses on rental income can reduce your tax liability, is that tax saving worth it? When you collect rent from a residence, you are changing the status of that property from principal residence to real estate investment. However, you retain the principal residence status if you are renting only a portion of the property and have not made structural changes.

The CRA exempts you from capital gain tax when you sell your principal residence. So if you plan to sell the property, you still have to report rental income. However, you may want to consider whether or not to claim expenses. A tax consultant can crunch the numbers and guide you through all your real estate dealings in a tax-efficient manner.

Expensive Tax Mistakes When Buying and Selling Property

It is not just accounting mistakes; a tax consultant can help you buy and sell property in a tax-efficient manner.

Buying Property: Some landlords buy properties under the name of a corporation to enjoy lower corporate tax on rental income. However, corporate ownership may not always be tax beneficial, as you may not be able to claim the principal residence exemption (PRE). A tax consultant will assess your current income, rental portfolio, retirement plan, and long-term financial goals to calculate tax and legal liability and accordingly suggest a tax-efficient ownership structure.

Selling Property: If you are selling a rented property, you will have to accurately calculate capital gain. An accountant will calculate the capital gain by adding the cost of renovations and the costs incurred to sell the property (commission, legal fees, advertising) to the adjusted cost base. They will also determine the years for which you can claim the principal residence exemption.

Real estate transactions are complicated, and their taxation is even more complicated. It is better to seek professional help when renting the entire apartment or a portion of it, renting your property for short-term, selling your property, earning rent from Canadian property while living abroad, or receiving an audit notification from the CRA.

Contact Ford Keast LLP in Southwestern Ontario to Help Landlords with Accounting Requirements

Talk to a professional accountant to help you report your rental income in a compliant manner and maintain detailed records. At Ford Keast LLP, our accountants and tax consultants can provide services such as tax filing and record maintenance. To learn more about how Ford Keast LLP can provide you with the best accounting and taxation services, contact us online or call us at 519-679-9330.