If you have got rental income from renting out your property or part of your home, you have to report your rental income and expenses by filling out a Form T776 Statement of Real Estate Rentals as part of your T1 Income Tax Form. The first step is to calculate your rental income correctly.
Here’s what you need to know to make sure you are coming up with the right number.
1. Share of ownership of your rental property
Before you can determine how much of the rental income to declare, you need to know the share of the property you own. If you are the sole owner, Canada Revenue Agency considers you to be the only owner, and you declare all of the income. If you and your spouse, common-law partner, friend or other person own the rental property, CRA considers you to be co-owners. As co-owners, you declare a portion of the rent as decided in a written or verbal agreement between the owners.
You should report the rental income the same way for each year you own that rental property. In other words, you cannot change the percentage of the rental income or loss you report each year unless the percentage of your ownership in the property changes.
2. You cannot claim rental loss by renting below fair market value.
Fair market value is the price of your property would rent on the open market if put up for rent. If CRA suspect you are renting your property below fair market value, they can use “comparable” rental price in the area to determine fair market value.
If you lose money because you rent a property to a person you know for less money than you would to a person you don’t know, you cannot claim a rental loss. However, you can claim a rental loss if you are renting the property to a relative for the same rate as you would charge other tenants and you reasonably expect to make a profit.
If you ask your son or daughter, or another relative living with you, to pay a small amount for the upkeep of your house or to cover the cost of groceries, you do not report this amount in your income, and you cannot claim rental expenses.
3. Accounting methods used in calculating rental income.
There are two methods you can use to claim rental income: the accrual method and the cash method.
The cash method is used if you have no, or a small amount receivable and no expenses at the end of the tax year. Using the cash method, you claim the rental income and expense deductions in the year they were earned and paid.
The accrual method requires that you claim rental income and expenses in the year they were due or payable whether you collected them or paid them in that year.
In most cases, you should calculate your rental income using the accrual method. According to this method, you:
- include rents in income for the year in which they are due, whether or not you receive them in that year; and
- deduct your expenses in the year you incur them, no matter when you pay them.