If you own a rental property or you choose to rent out a portion of your home, there are various expenses that you can deduct while calculating your net rental income. These include property taxes, home insurance, mortgage interest (not principal), utility costs, advertising, repairs and maintenance costs and property management costs. Unless the rental is considered business income, the income and expenses can be recorded using cash-basis accounting. If the rental is considered business income (i.e. you are in the business of renting out properties) then the accrual basis of accounting must be used.

Your net rental income or loss is included in your personal tax return. You can also use your rental losses to reduce income from other sources. If your rental loss is more than your income from other sources and it can’t be deducted from the present year tax return it then turns into a non-capital loss, which you can carry forwards, or backwards to minimise taxable income from other years. You may be able to claim Capital Cost Allowance (CCA) based on the price of the residence, fixtures, and furniture etc., but not the actual land. This may not be used to create a rental loss. However, if you only rent part of your home then you can only claim a part of the CCA and this means you may lose your principal residence exemption when you come to sell the property.

Claiming CCA should be a decision you make with your accountant because it can affect your use of the principle residence exemption and if the value of your property (excluding land) increases or remains constant, you will have to repay the CCA you deducted upon selling the property (this is called recapture).

A deemed disposition can occur if there is a change in the use of your residence from personal to rental or vice versa. That means you will be considered to have sold your home and purchased it again straight away for its fair market value. For more information on the change in use rules, take a look at our blog “What to do when you start renting out your home or move into your rental property?“.