# Rental Income



## Longstreet

I have a question regarding paying taxes on rental income. For simplicity, I will state that I'm married (soon to be in reality). I bought I house with two bedrooms in the basement. I rent both of them for a total of $850/month. The house and all the bills are in my name only. Since I have a much higher income than my wife, it would make sense for the rental income to be taxed in her name. 

How could I make the rental income taxable under her name? Does she have to pay the bills as well (ie have the bills in her name as well)? Who claims the expenses for owning the property (ie taxes, electricity, water) and who claims the income? Do they have to be the same person? Any advice would be helpful. Thanks.


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## sprocket1200

with your high income you need many deductions. pay her for managing the rental and find as many other expenses as you can...


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## MoneyGal

Be careful about the advice you get from an anonymous Internet forum. 

Assuming you are married, and if this is your wife's principal residence (together with you), and you do not attribute the rental income equally to her and to yourself, you will put at risk her principal residence capital gains exemption if and when you sell the house (there's only one PR exemption per family, and she can't live in it with you and *not* have a PR. Your PR is the place where you are ordinarily resident.)

When you are the owner of a property, you cannot deduct the value of your own labour against rental income. 

If you are not married, your situation is more complex. 

You are entitled to arrange your affairs to legally pay as little tax as possible, but not more. Practically speaking you should claim the rental income and all expenses until you are married, and then you should split the rental income and all expenses equally after that point. If you are equal and joint owners, this is how rental income and expenses are allocated. If you are not equal and joint owners, you will need a pre-nuptual agreement which spells this out plus some tax planning advice which is beyond what you can get in this forum.


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## Cal

Go see an accountant....money well spent, as Moneygal pointed out above, it sounds simple, but could prove to be a complex issue.


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## Berubeland

A good book I have read is 91 tax tips for real estate Owners and Investors. Or even better the author George Dube is an accountant. It is REIN book but just ignore all the happy happy joy joy crap and calls to join their network, it's still very worthwhile


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## marina628

I have investment properties and here is what I was told , the portion of income has to be claimed equal to your percentage of Ownership.If she is not on title you have to claim it 100% .Even if you are married and she is not listed on title she cannot claim any revenue from it.
My husband has a property that is not in my name and he claims all expenses and revenue.We also own one with a friend and our friend claims 50% ,my husband and i each claim 25%.


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## marina628

Longstreet said:


> I have a question regarding paying taxes on rental income. For simplicity, I will state that I'm married (soon to be in reality). I bought I house with two bedrooms in the basement. I rent both of them for a total of $850/month. The house and all the bills are in my name only. Since I have a much higher income than my wife, it would make sense for the rental income to be taxed in her name.
> 
> How could I make the rental income taxable under her name? Does she have to pay the bills as well (ie have the bills in her name as well)? Who claims the expenses for owning the property (ie taxes, electricity, water) and who claims the income? Do they have to be the same person? Any advice would be helpful. Thanks.


Also if you live upstairs and rent basement you can only write off percentage of house that you do not occupy.I do not recommend you trying to write off 'management' expenses in a home you live in


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## Longstreet

Thanks for all your posts. As a quick follow up, I had to do some renovations to get those rooms in a condition that they could be rented out safely. I also had to buy some tools to do the renos. Are these tax deductible? Thanks for your time.


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## marina628

Tools no. Building materials yes .


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## sprocket1200

tools yes, building materials yes. you just have to figure out how to do it. if you are buying RE with other partners, please protect yourself and have a holdco own the property while your company owns 50% of the shares with the other partner.


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## marina628

OP appears to live in this house.If he was buying a flip probably could argue that in a Audit.If he owned a business and purchased tools then they can be written off but I get impression he is also living in this house.
These are the fine lines your accountant will sort out for you.


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## sprocket1200

marina628 said:


> OP appears to live in this house.If he was buying a flip probably could argue that in a Audit.If he owned a business and purchased tools then they can be written off but I get impression he is also living in this house.
> These are the fine lines your accountant will sort out for you.


but clearly since you own property with someone else, the situation is different, so you do write off your tools, don't you? the OP could as well, if he had a holdco and used it to run RE investments. of course, it wouldn't own his residence, but he could use it for future investments. 

I do agree with you, such are the fine lines a GOOD accountant will advise you on...and, yes, there is a huge difference...


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## MoneyGal

(1) If he also lives in the house, he can potentially write off a portion of the tools based on the percentage of space allocated to rental use, and the percentage to personal use. 

(2) tools may be a current use cost, or a capital cost. If any one tool costs more than $500, it must be capitalized over time at the rate of 20%. However, this only applies to tools acquired solely for rental purposes. The general rule is to "write off" (deduct) a portion of the cost equal to the percentage of the residential space that is rented.


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## marina628

I have four rental properties and one with a partner , we have never written off tools on a rental property as expenses.
Read his post ,why are you going on with HOLDCO etc ?He is asking about his PRESENT SITUATION.
Also to homeowners who rent out basement apartments , if your expenses exceed the income for two Years I KNOW PERSONALLY of situations where CRA will disallow the expenses .I had a basement apartment in a 2 story home and wrote off 1/3 of the expenses ,in year two as rent was only $450 a month we were still negative and they voided our expenses.
In any case you should call up CRA but if they tell you that tools can be written off be sure to get name of the person and their direct line and save it.Definitely that one can come back and bite you in the *** and I have been renting out properties since 1991.OP is not running a business , he has one home and a basement tenant.


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## MoneyGal

Oy. This thread is getting really confusing. Part of the problem is that CRA uses very specific terms, not generic phrases like "write off." 

I am going to correct and add to what I said earlier about capital expenses for a rental property. 

First thing is that CRA has a precise definition of what you can write off in repairing and maintaining a rental property:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/rntl/bt/rprt/xpns/ln8960-eng.html

It says, "If you pay for repairs to your property, you can deduct the cost of labour and materials." 

Note that "tools" are not included there. When I was thinking while posting about what "tools" might be included, I was thinking about low-cost items like hammers and wrenches, maybe paintbrushes. CRA is not going to care about the odd paintbrush thrown into current costs...but it sounds like big-ticket items (power tools?) are best NOT included in the mix. 

Additionally, I noted earlier that bigger-ticket items must be capitalized, not deducted as a current cost. Here's what I want to add and underline: you should be very wary of capital costs associated with your principal residence. Why? Because you want to retain the capital cost exemption associated with your principal residence. 

Specifically, renovations which improve the residence (even if only to make the rooms rentable) are *capital* costs, not current costs. But if you start capitalizing those costs against the house, _you will lose the principal residence exemption_ on a portion of the gain associated with that fraction of the house if and when you sell the house. 

I really hope that reading through this thread convinces the OP that he needs to see an accountant in person, who can clarify each of these questions and provide specific guidance.


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## MoneyGal

marina628 said:


> I had a basement apartment in a 2 story home and wrote off 1/3 of the expenses ,in year two as rent was only $450 a month we were still negative and they voided our expenses.


What expenses were you writing off? How could your current expenses for 1/3 of the house put you in a loss position if you were making money from the apartment?


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## marina628

Yes Moneygal you can write off materials and labor not tools.I did a $22,000 basement in one of our houses , we had to buy the big table saws etc as my husband and brother in law did all the work.My husband got ZERO for his labor but we were allowed to pay the others wages and deduct it.
Another thing i recommend is taking before and after photos in case you are ever audited.


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## marina628

MoneyGal said:


> What expenses were you writing off? How could your current expenses for 1/3 of the house put you in a loss position if you were making money from the apartment?


This was back in 1991 ,we lived upstairs ,rented basement for $450.00.We had to do renovations to basement much as op is stating .and the rent was not covering 1/3 of the cost.So in 1992 when we filed CRA would not allow us to claim it.They felt we were not charging market value for basement,interet rates were 9% on mortgages back then 
total rent for the year $5400 ,interest on a $160,000 mortgage was about $11,000 then you add insurance and other costs it was in a loss each year.


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## MoneyGal

The renovations to the basement should not have been deducted but should have been added to the cost base for the house as a capital cost. I suspect that's why they were disallowed. 

But yes, when in doubt, CRA may disallow all costs, not just a portion.


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## marina628

Moneygal ,When we got declined we lived in that house in 1991 and it was $1100 expenses at that time to do basement walls ,paint and plaster new taps few things like that .
I have a few houses so the expensive job was not this house,that was a house purchased in 2009 and the cost was $22,000 to us but all we wrote off was $8000 for home depot and some labor costs.Definitely it added value to the house though.


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## MoneyGal

I don't know whether we are talking about the same thing, or what. 

When you make capital improvements to a property, you do not deduct those costs as current costs. Instead, they are added to the cost base of the house. Here's the CRA reference: http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html#P300_26515 (Go to "current or capital expenses?")

When it is your principal residence, not only do you not deduct those costs as current costs, you do not add them to the cost base - because you are not claiming a taxable capital gain on the change in value. 

So if you are adding basement walls to rent out rooms in a house that you occupy as your principal residence, you don't deduct those costs from rental income, nor do you add them to the cost base of the house by capitalizing them.


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## marina628

MoneyGal said:


> I don't know whether we are talking about the same thing, or what.
> 
> When you make capital improvements to a property, you do not deduct those costs as current costs. Instead, they are added to the cost base of the house. Here's the CRA reference: http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html#P300_26515 (Go to "current or capital expenses?")
> 
> When it is your principal residence, not only do you not deduct those costs as current costs, you do not add them to the cost base - because you are not claiming a taxable capital gain on the change in value.
> 
> So if you are adding basement walls to rent out rooms in a house that you occupy as your principal residence, you don't deduct those costs from rental income, nor do you add them to the cost base of the house by capitalizing them.


My properties are 100% investment properties ,not my principle residence ,my only principle residence we had rental income with was in 1991-1994 .I think we are just confusing the thread here but you hit nail on head for OP as he lives in the house he is limited in what he can deduct.Which is why I don't do it anymore and we have a Holding company for our investment properties ,have employees and completely different set of rules apply then as we are FILING corporate taxes not personal.I will shut up now


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## I'm Howard

My Neighbours rent out their home during ski season and go south, not sure they bother reporting the income, but if revenue Canada came after them, my take is that they can write off all expenses associated with renting alternative accommodations needed while theirs was being occupied??

i would take this to include travel expenses and accommodation expenses plus any monies paid out that weren't recovered from renters, including Property Taxes for the Rental Period??


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## Plugging Along

I'm Howard said:


> My Neighbours rent out their home during ski season and go south, not sure they bother reporting the income, but if revenue Canada came after them, my take is that they can write off all expenses associated with renting alternative accommodations needed while theirs was being occupied??
> 
> i would take this to include travel expenses and accommodation expenses plus any monies paid out that weren't recovered from renters, including Property Taxes for the Rental Period??


The alternative accomodations would be considered personal expense, and would not be claimable. This would be too big of a loop hole. People could rent out their PR, and then claim their rents.

Travel expenseses would be allowed only if you were going to your rental for the purpose of generating revenue. Not just moving back in.

Accomodations are considered personal.

Property taxes would be okay.


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## I'm Howard

The revenue would not be generated unless they rented an alternative accomodation, so I would think it is a legitimate expense??


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## iherald

MoneyGal said:


> I don't know whether we are talking about the same thing, or what.
> 
> When you make capital improvements to a property, you do not deduct those costs as current costs. Instead, they are added to the cost base of the house. Here's the CRA reference: http://www.cra-arc.gc.ca/E/pub/tg/t4036/t4036-e.html#P300_26515 (Go to "current or capital expenses?")
> 
> When it is your principal residence, not only do you not deduct those costs as current costs, you do not add them to the cost base - because you are not claiming a taxable capital gain on the change in value.
> 
> So if you are adding basement walls to rent out rooms in a house that you occupy as your principal residence, you don't deduct those costs from rental income, nor do you add them to the cost base of the house by capitalizing them.


Moneygal, thanks for taking the time to write this. My issue might be the difference between capital improvements and capital costs, but I've read the T4036, and think I understand the difference between capital and current costs. However, I do not understand why you add the capital cost to the value of your house?

For an example, lets say I buy a dishwasher to put in my main floor apartment (where I live upstairs). It's not a current expense because it has lasting value (if you buy a good one). So I deduct 20% of the cost every year until 0 (let's forget about the first year). 

If I were to dig out the foundation of my house so I could lower my basement to get an apartment in there, I guess that's a capital improvement? I guess it makes sense that I can't write off that expense if I wanted to be able to get the principal residence exemption, since in theory the value of my house increased.


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## MoneyGal

I want to be sure I'm crystal clear: you are talking about a dishwasher that you would use personally in a space that is not rented. Right? 

If this is correct, then you would not deduct the cost in any way (current or capital) because the dishwasher is not being used to earn rental income. 

But your larger question seems to be: why would you not deduct capital expenses when you improve your house, part of which is used to earn rental income. Is that right? 

I realize that I am mixing together (inadvertently) capital cost allowance on the building itself, and capitalization of improvements to the building. When I get more time, not now, I will give you the links to follow in the CRA website.


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## Plugging Along

I'm Howard said:


> The revenue would not be generated unless they rented an alternative accomodation, so I would think it is a legitimate expense??


I'm not sure how to explain it other then it wouldn't be accepted as a legitimate expense. Having to live some where is considered personal. If you choose to go down south, that is also personal. You would be double dipping by being able to claim the portions of the rental property expenses and the your own rental accomodation. 

By this logic, I could be currently renting a place, and then decide to buy a place for investment, and all of a sudden my current rent would be a deduction.


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## iherald

MoneyGal said:


> I want to be sure I'm crystal clear: you are talking about a dishwasher that you would use personally in a space that is not rented. Right?
> 
> If this is correct, then you would not deduct the cost in any way (current or capital) because the dishwasher is not being used to earn rental income.
> 
> But your larger question seems to be: why would you not deduct capital expenses when you improve your house, part of which is used to earn rental income. Is that right?
> 
> I realize that I am mixing together (inadvertently) capital cost allowance on the building itself, and capitalization of improvements to the building. When I get more time, not now, I will give you the links to follow in the CRA website.


No, I rent out the main floor of my house. Last year I put in new appliances, so the tenant has new appliances. I'm writing those expenses off. 

Obviously anything I have in 'my' apartment I don't write off.


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## kcowan

I think some people consider the CRA to be stupid. If you just think like they do, you will be a lot safer.

I had a run-in with them when I moved to BC. They said: "You want the taxpayer to finance your move to BC? NOT!"


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## Longstreet

*Capital vs Current*

MoneyGal,

Thank you very much for steering me in the right direction; your links were very helpful. Although I need to read it again to thoroughly understand it, the renovations that I did do were current expenses and did not significantly alter the property. All I did was replaced the floors and drywall downstairs, re-did a bathroom, etc. I didn't add any walls, additions, or the like. Thanks again.


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## MoneyGal

I am coming back to complete the discussion on CCA for rental properties as promised. 

A building is a depreciable property. If you rent out space in your principal residence, you can, if you wish, claim a capital cost allowance on a portion of your purchase price to account for the depreciation of the building over time. 

(Side note: depreciation and capital cost allowance are not actually identical terms: one is an accounting concept [depreciation] and one is a tax concept [CCA]. CCA rates may not align with generally accepted depreciation rates, and vice versa.)

However - if you claim CCA on a portion of your principal residence, you put at risk the loss of the capital gains exemption on your principal residence if and when you sell it at a gain. Here is a very basic link on this concept:

http://www.taxtips.ca/personaltax/propertyrental/rentalexpenses.htm

Separate from taking CCA on the purchase price of the building itself, you can claim CCA on capital improvements to the building, ranging from a dishwasher to a new roof to the installation of a bathroom to upgrading the floor coverings. 

The decision to take CCA on these expenditures is not necessarily straightforward and if you are going to take CCA on your principal residence, I recommend reviewing your situation with a CA.


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## iherald

Longstreet said:


> MoneyGal,
> 
> Thank you very much for steering me in the right direction; your links were very helpful. Although I need to read it again to thoroughly understand it, the renovations that I did do were current expenses and did not significantly alter the property. All I did was replaced the floors and drywall downstairs, re-did a bathroom, etc. I didn't add any walls, additions, or the like. Thanks again.


I had this issue last year when I gutted the apartment in my house. I replaced the hardwood floors with new hardwood floors. According to my reading they were a current expense, as the floors did not 'improve'. However, I put them as a capital expense since I figured why alienate the tax man. Plus, I was getting such a big write off anyway, I figured this way it would be over time.


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## dagman1

I have a similar question so I thought this would be the place to ask. I'm thinking of CCAing my rental property next year. I have a couple of questions.

Since land is not depreciable, how do I determine the initial value of the building?

I see you alluded to this earlier, but will this affect my lifetime capital gains exemption? For example, if by CCAing my property over the years I end up with a UCC of $150,000 and sell my property for $200,000, am I correct in assuming $50,000 will be added to my income for that year? Will there be any effect on my LCGE?


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## stardancer

dagman1 said:


> I have a similar question so I thought this would be the place to ask. I'm thinking of CCAing my rental property next year. I have a couple of questions.
> 
> Since land is not depreciable, how do I determine the initial value of the building?


Generally, you look at the split between the land and the building when they were first purchased. For example, the purchase price could be 60% building, 40% land. Different areas of the country have different land values. Where I live is not the same as real estate in Toronto. Once you have determined a reasonable split for your area, you must stay with that split until you sell. The selling price then would be according to the same split to determine the capital gain(loss). You could consult a real estate agent for guidance.


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