Rental Income and Taxes
Have you been thinking of acquiring a rental character or renting part of your house for income? This article will go by the basics of renting character. For more information, visit the CRA web site and search for rental income.
Rental Income is when you rent character for someone else to use. character is usually thought of as real estate, but it can be anything that can be rented like a car, snowmobile, strength tools, computer and so on. The expectation is that there will be profit because if there is no money being made, there would not be any taxes owing. There would nevertheless be a requirement to report activity in most situations, but renting something generally assumes that money will be made over time.
Rental Income Versus Business Income
If you are renting a character only, this would be considered rental income. If you are providing a service that goes along with the character and charging for it, then this would be considered a business. The typical example to show the difference is a Bed and Breakfast. Since there are meals and laundry sets that may be provided, this is considered a business as opposed to just having a place to stay on the character and doing your own cooking and cleaning. If there is an existing business and renting a character is a related part of it, then the renting would be considered part of the business. As an example, if you are making auto parts and you lease part of your space temporarily, this renting would be part of your auto parts business instead of rental income.
What Difference Does It Make If Your Activity Is A Business Or Not?
The differences between rental and business income are that rental income transferred to a spouse or child may be credited back to the person who transferred it while income from a business does not have this restriction. This method that whoever paid for the rental character would have to declare the income for tax purposes. If you have children involved in sharing the profit from a rental versus a business, this would average a difference in who can declare the income and expenses. Rental income is earned where the owner of the character lives, while business income is taxed on where the business is located. If you have multiple locations for rental similarities or multiple businesses with different tax rates, this may average a higher or lower tax bill depending on where the businesses are set up. The deductions that are obtainable may differ between rental and business income. There are different rules regarding depreciation of assets or Capital Cost Allowance (CCA) for rental similarities as opposed to businesses. Rental income would not unprotected to CPP deductions but business income would be. A rental character has a calendar year reporting period, but a business can change this to any time during the year. Depending on what your circumstances are, these differences can save you money or create a larger tax bill.
How Do You Report Rental Income?
Rental income is reported on the form T776 -Statement of Rental Income which can be found on the CRA web site. This form would be submitted along with a personal tax return as an additional document. If the renting is part of a business, the form to use is the T2125 – Statement of Business and specialized Activities which is the business form. This would also be additional to a personal tax return as an additional document.
Current Expense Versus Capital Expenditure
Both a current expense and a capital expenditure represent money spent during the current tax period. If an expense is occurring to keep the character maintained and in the same working order as before the money was spent, this would be called a current expense. Examples of this are costs that occur day to day for the operation of the rental character – such as utilities, insurance and character taxes. A capital expenditure is money spent on something that is expected to last longer than one year and is either a separate item acquired for the character or an improvement to the character. If the money spent would make the character more valuable or useful compared to otherwise, this would be called a capital expense. An example of a separate item would be an appliance for the kitchen inside the rental character. This appliance is expected to last more than one year, can be moved into another part of the house so it is a separate item, and it is being used by the tenant so it is a viable expenditure for deduction. If there are costs incurred to set up a character or get it obtainable for rent, these costs would be considered capital expenses, and would be part of the acquisition cost instead of separate expenses. The intention behind the money and the state of the character before and after the expense are important in calculating how money spent should be treated for tax purposes.
Tax Treatment of Current and Capital Expenses
The major difference between current and capital expenses is the timing of their deduction. The current expense is deducted in the year it occurred in complete. A capital expense would be deducted over the life of the asset which usually would average a period of years. This method that the expense would be deducted more slowly. The spreading of the deduction over multiple years is called depreciation. This is calculated by finding out the class of the item or expense, finding the related depreciation rate and then using that as a uncompletely deduction each year until the expense has been fully accounted for. As an example, if you bought an appliance and it was a Class 8 item, the associated rate of depreciation would be 20% per year. This method that if you buy an appliance that costs $1000, you can deduct 20% of that $1000 or $200 per year.
Depreciation of the character Itself
Whether to calculate depreciation on the character itself is a choice that is to be made by the taxpayer. There are advantages and disadvantages to claiming this expense. The first factor to keep in mind is that depreciation on the character cannot be used to create a loss on renting the character. If your character is not that profitable, you would not be able to claim much depreciation already if you wanted to. The second factor to keep in mind is that if you claim depreciation, you will likely have to pay more taxes later when you sell the character. Land and buildings do not go down in value very often. When there is a sale, there is usually a capital gain incurred and there will be taxes paid on a fraction of that gain. If you were claiming depreciation along the way before the sale, your tax bill would tend to be higher than otherwise.
Are You Using the character Personally?
If you are renting something and using it personally at the same time, the rental and personal use portion would have to be divided in some way. This is because anything used for personal reasons would not be deductible or reported on a tax return, but rental character would be. If it is a house being rented, the space would be divided into personal use and rental space, and any expenses would be prorated to mirror how much of the expense should be allocated to the rental character.
The rules discussed in this article are very general and will apply to most rental situations. For more specific situations and further detail, visit the CRA web site.