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Some things to consider.
In
today’s economy, meeting mortgage payments may be too much of a burden to
bear.
In fact, purchasing a home may seem beyond your realm of
possibilities.
However, if you are willing to tolerate living in the same residence
as another family, renting a suite out of your home can relieve some of the
economic pressure of mortgage payments.
Beware!
Always consult the municipal authorities to ensure the suite is
possible within your jurisdiction. Do I have to report rental income? Unfortunately, Canada Revenue Agency (CRA) wants their piece of the rental income as well. They require that all rent collected (not including security deposits) has to be declared on your personal income tax return. Also, you must use their prescribed form and classify all expenses within their guidelines. Expenses relating to the rental suite can be fully deducted if they were incurred for the purpose of earning the rental income Do your expenses qualify? Any expenses directly related in generating rental income are deductible. These expenses include but are not limited to, utilities, property taxes, house insurance, repairs and maintenance, accounting and legal, and advertising. Keep in mind that only a reasonable portion of your existing residence's expenses can be deducted. Capital cost allowance (CCA) can be claimed on furniture purchased for the suite and on a portion of the building cost. Claiming CCA on your home can prove to be detrimental by leading to recapture when the house is sold and disqualifying a portion of your home for the principal residence exemption. Therefore, CCA is rarely claimed. Also, CCA on the building will not be allowed if it creates or increases a rental loss. The Income Tax Act does not have rules for allocating eligible expenses. A commonly used method is taking the percentage on theto apply the percentage that the rental area is of the total house area to the eligible expenses. If your expenses outweigh your revenue, you have created a loss that can offset other income. However, CRA may disallow these losses if they feel there is no expectation of profit from the rental suite. What is a reasonable expectation profit? The term “reasonable expectation of profit” is not defined. Rather it is a test that CRA uses to determine whether or not a loss from the rental suite can be used against other sources of income. Some keen investors may purchase a home with a rental suite in order to generate rental losses to offset some of his/her other income. Their goal would be to retain the property long enough to enjoy the inflationary gains from selling the property without any expectation of profit on an annual basis. Basically, the concept questions whether a reasonable person would expect the rental unit to eventually make a profit. If the answer is yes, then losses from the rental could be used to offset other sources of income. If the answer is no, then the losses may be disallowed. In fact, if a loss exists you are not required to claim the rental suite on your personal tax return. Unfortunately, if you have claimed losses in past years and they are disallowed due to no expectation of profit, CRA will disallow prior years’ losses and leave you with an unexpected tax bill including interest. The reasonable expectation of profit tests applied by CRA have been successfully challenged by taxpayers in the courts. As a result, these tests have not been enforced with the same vigour as in the past. however, proposals have been made to amend the Income Tax Act to provide CRA with the legislative authority to apply the reasonable expectation of profits test once again.
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