Renting out a second property
We have covered renting out a portion of your home, but what do we need to know when we own a second property to rent out full time?
There are a couple of situations we need to talk about:
Long-term Rentals
A long-term rental is a term of over 30 days (1 month) – pretty straightforward.
When you have a long-term rental, all rent received, and all expenses related to that income are reported on your tax return.
Generally, that will include property taxes, insurance, utilities, interest, and maintenance and repairs. Additionally, you can claim legal and accounting fees related to the rental property, as well as any costs associated with advertising for new tenants. In certain situations, you may also be able to claim vehicle expenses against this income.
If you make capital improvements or additions to the property, these are not expensed but added to the cost of your property for purposes of both the future sale as well as Capital Cost Allowance (depreciation).\
Long-term residential rentals are exempt from GST/HST – so that isn’t something we need to worry about!
Short Term Rentals
Short-term rentals are terms of less than 30 days for greater than $20/day. This would be most common with third-party rental programs such as AirBnB or VRBO.
The tax on the income is generally the same as long-term rentals – total rental income less rental expenses. The most significant difference is that short-term rentals are NOT exempt from GST/HST. This means that if your annual revenue exceeds $30,000 (among all short-term properties, not on an individual basis), you will be required to charge and remit GST/HST to Canada Revenue.
This can be especially difficult because some of these third-party programs do not automatically include GST/HST in the price provided to your customers. This means that you need to reach out to customers directly for the additional tax or treat a portion of the after-fee income from AirBnB or VRBO as GST/HST, which reduces the amount you keep and report as income.
If you do not have at least $30,000 in short-term/business income, you are not required to register for GST/HST. However, you may wish to voluntarily register as this allows you to claim the GST/HST you pay on expenses. This can make sense if you are making major renovations on the property.
Are you running a business?
If your rental also provides other services (such as meals, laundry, etc.), CRA may consider you to be running a business rather than renting your property.
Business income is taxed the same as rental income (on your personal tax return – contact your accountant if you are incorporated!); however, there are a couple of important differences:
- If you are running a business, you may be able to claim home office expenses in addition to your other expenses.
- You pay CPP (both employee and employer portions) on self-employed business income but not on rental income
- Business income is subject to the GST/HST limits discussed earlier (though it is rare to have a long-term rental that would be considered a business)
Selling your rental property
If you have a rental property, you will need to pay tax when you sell it if you sell for more than your cost.
In Canada, you are taxed on the capital gain on the sale of a property.
A capital gain is calculated as:
Proceeds – Adjusted Cost – Outlays = Capital Gain
Where:
- Proceeds are the agreed selling price before expenses
- Adjusted cost is the original purchase price, including expenses, plus capital improvements and additions
- Outlays and expenses are selling costs such as legal fees and commission
Currently, in Canada, 50% of this capital gain is taxable. Meaning if your gain using the above formula were $100,000, then 50% of this amount – $50,000 – would be added to your income and taxed on your personal income tax return.
