Rental Properties

The Internet has changed the way we live. More than ever before, it is easy to rent a spare room to a complete stranger for their week-long vacation or to rent your entire house while vacationing in Mexico. You can list your property for rent on one of many Internet sites and start watching the money pour in. However, prior to posting that listing you should be aware of a few things. 

The City of Fernie has adopted Bylaw No. 2325 that provides municipal rules regarding short-term rents. The Bylaw states that you must get a business license and comply with other rules such as inspections, adequate parking, and snow removal. For the complete set of rules contact the City of Fernie. 

The Income Tax Act requires us to share our wealth with the Federal and Provincial Governments. Rental income is subject to income tax whether it is for a single night or for years of continuous living. Rental income and expenses are reported on form T776 of your T1 personal tax return. You can deduct the expenses you incurred to provide the accommodation; however, if you are renting a single spare bedroom in your house with access to the bathroom, kitchen and living room, you must come up with a reasonable method to allocate shared expenses. Canada Revenue Agency (CRA) publishes Guide T4036 Rental Income to provide information on their interpretation of the law. In the guide, CRA suggests that a property with rental use and personal use must divide expenses that relate to the whole building between personal part and rented area. Using the number of rooms or square metres of use is suggested. 

You may also have to consider periods of occupancy. For example, consider a scenario for a one-room rental where you have a tenant occupying the room from January to April, your child occupying the room May to August while home from university and the room is empty from September through December. You would only be able to deduct shared expenses on the square footage basis for the four months the room was rented.

Current expenses are deducted in the year they are incurred but you can only deduct a portion of capital expenses each year. Current expenses are those outlays that are consumed in the year, such as utilities and supplies like toilet paper. Items such as furniture are considered capital expenses, as they provide benefit over more than a single year. Capital outlays get added to capital pools and only a portion may be deducted each year through capital cost allowance (depreciation). Capital cost allowance cannot be used to create a loss and you can only claim capital cost allowance against rental profits. 

When you claim expenses you need to have records to support the claim if you are audited.  That means you need to keep invoices, receipts, contracts, to prove the deductions. Credit card statements and debit machine printouts are not sufficient to prove an expense amount.  You must have the invoice that includes a description of the expense, the date, amount, terms and name of vendor. 

GST may need to be charged on rent if the rental period is less than thirty days and you are not considered a small supplier. To qualify as a small supplier for GST purposes, you and all of your associated businesses must have annual sales under $30,000. If your combined annual sales from all business activity is over $30,000 you must be GST registered and charge GST on all short-term rents. If your short-term rental business is successful you may get a surprise when you sell your house. Used residential property is GST exempt. However, if the primary use of your house has become short-term rents, rather than your own personal residence, you no longer have a used residential property; rather, you have commercial property similar to a hotel, which is not GST exempt. If this is the case you have also lost the access to the principle residence exemption for that year, meaning that you could owe income tax on a portion of the gain when you sell your house.

If you are renting more than four rooms, under BC provincial legislation, you must charge and remit an 8% accommodation tax. Additional municipal and regional district tax of up to 3% may also be applicable. The rules for these taxes can be found in PST Bulletin 120 – Accommodations. 

For more information please consult with your professional tax advisor.