If you’re fortunate enough to have a vacation property in your family, you may have thought about cashing in on the hungry cottage-rental market as an easy way to make some extra income and write off a portion of your costs. But it isn’t a free-for-all; you’ll need to be mindful of a few rules to stay onside with the taxman.
When can you deduct expenses?
If you rent out the cottage for a couple of weeks to friends or family for a nominal rent resulting in a rental loss (meaning, you’ve charged less than it costs you to carry the property), be aware you won’t be able to claim the expenses or the loss. CRA considers this to be a cost-sharing arrangement. To deduct expenses, there must be a profit motive—a potential source of net income—for you to claim expenses, so be sure you are consistently charging fair rental value for use of your property. This includes rentals to family members, as well as those you don’t know.
What if you share ownership?
When two or more taxpayers jointly own the cottage, each of the owners will account for their respective share of the revenue and expenses. One statement will be produced for tax purposes, showing the co-ownership. Then, each co-owner will make their own allocations for certain expenses like capital cost allowance (CCA). It’s always a good idea to get professional help with these more complex calculations.
Allowable expenses are usually deducted on a cash basis—that is, in the calendar year in which you incur them—as long as you match them to the revenue earned in the same period. They will also need to be prorated for the rental period if you’re also enjoying the property for your own personal use. Remember that costs incurred to improve the useful life of the property, as opposed to those that are used up in the rental arrangement, must be added to the cost of the property itself. Those costs can be applied to reduce a capital gain on the property, if there is any in the future.
So which expenses are deductible against rental revenue? Here are 11 you can consider:
- Advertising—Amounts paid to advertise the availability of the cottage in local papers, on social media and rental websites.
- Insurance—This is an expense that can rise significantly when you disclose that you are renting the property. The good news? The additional costs are deductible against rental revenues.
- Landscaping costs—These may be deducted in the year paid.
- Legal, accounting and other professional fees—There are some special rules here. For instance, legal fees incurred to prepare leases or to collect rent are deductible against rental income, while legal fees you pay to acquire the property itself will form part of the cost of the property, which means they will reduce any future capital gain on the property. This is also true of legal fees incurred on the sale of the property.
- Accounting fees—The amount you pay to bookkeepers or tax professionals to prepare statements, keep proper books and records for the rental property, or to prepare the tax return, will be deductible.
- Maintenance and repairs—Costs of regular maintenance and minor repairs are deductible, but be careful here. This is where many landlords run into issues with the CRA. For major repairs, you must consider whether the cost is a current expense or capital in nature. If the expense improves the useful life of the asset, as opposed to simply restoring the asset to its original condition, it’s not considered an expense but a capital addition. Capital additions reduce your capital gain when you sell the property.
- Management and administration fees—If you pay a third party to manage the cottage rental, those fees are deductible, including what you might pay a service like Airbnb.
- Mortgage interest—That’s deductible, too, as is interest incurred when new loans are taken to improve the property.
- Utilities—If you provide the utilities as part of the rent, then they are deductible.
- Motor vehicle expenses—Travelling expenses are generally considered to be personal living expenses when you own only one rental property. But if you personally travel to make repairs, the cost of transporting tools and materials to the property may be deducted.
- Home office and office supplies—As long as these expenses were incurred to earn rental income, you can make a claim on your return—prorated for any personal-use components. Property taxes and utilities for your home office are deductible, but be careful not to claim capital cost allowance (CCA) if you intend to use the property as a tax-exempt personal residence at any time in the ownership period.
Evelyn Jacks is President of Knowledge Bureau and author of Essential Tax Facts 2019. Follow her on twitter @evelynjacks
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