Rental Income and your Taxes
Rental income is income derived from renting out eligible property. The income is included in income and is 100% taxable.
This income income,however,is calculated on a net income basis, that is the gross revenues are reduced by the expenses incurred to maintain the property. These expenses include mortgage interest, property taxes, utilities, insurance, maintenance and repairs. capital allowance.The actual expenditures are categorized as capital expenditures and non-capital or current expenses. Capital expenses include those which are of a long lasting, permanent nature such as replacing the roof or windows. These expenses are spread out over time and claimed as depreciation.
Current expenses are ongoing operating expenses, such as painting, minor repairs, labour, landscaping or any expense that is incurred to restore or maintain the building to its original condition.
For income tax purposes, rental income is considered earned income and thus increases the RRSP contribution room. The income can be passive or active depending on the amount of services the owner provides for the tenants. Passive or property income is earned when the owner provides only the basic services (space, heat, light, etc)
If the owner provides a wider range of services like cleaning or meals, then she may be considered to be earning business income.
Special case: The principal residence
When a taxpayer rents a part of his principal residence, he is able to claim a portion of the costs of maintaining his home against the rent collected. In effect the tenants are helping to pay down his mortgage and other expenses, while the taxman is assisting by allowing deductions which reduces his taxable income. In addition, the taxpayer enjoys any appreciation of property values.
If the expenses exceed the revenues, a loss results. This lowers the taxable income and the taxes payable.
When revenues exceed expenses, then a positive net income results, which increases the taxable income and hence the taxes payable.
A rental income with a positive cash flow is a very tax efficient vehicle since it can be used to offset any increase in taxes and can be used for further investments.
For instance, the positive cash flow could be used to contribute to an RRSP to offset the increase in income, if sufficient room is available. Thus the benefits of rental income from your principal residence can be huge.