Personal Investor: Renting out a room to students? The CRA wants to know
As students fan out across the country for another school year, homeowners are finding opportunity in renting out accommodations.
There’s nothing wrong with making a few bucks renting out a room, but the Canada Revenue Agency wants a piece of the action – and how you claim deductions could be costly in the long run.
The name of the game is to preserve your home’s principal residence status. If the CRA considers your home a principal residence, you don’t pay any tax on the amount it appreciates when it is sold. As an example; if you bought your house for $400,000 and sold it for $800,000, you don’t pay any tax on that $400,000 gain.
If your home does not meet the CRA’s principal residence requirement, you must pay tax on half of that $400,000.
If you are drawing rental income from your home, there are three ways to ensure it remains your principal residence for tax purposes:
1. The partial use of the residence for income-producing purposes is ancillary to the main use as a residence. In other words, there’s a fine line between renting out a room and renting out a house the owner happens to live in.
2: There is no structural change to the property. You can put a coat of paint on the walls and make some modifications but you can’t build an addition, for example.
3. You cannot claim capital cost allowance (CCA), or depreciation on the property.
Of course, the rental income must be claimed (form T776) and filed with your tax return, but there are several deductions available to lower your tax bill. They can include: A portion of mortgage interest, property taxes, insurance, repairs and maintenance, landscaping, utilities, advertising costs, office expenses, professional fees, management fees, salaries or wages, travel costs, and car expenses.
If you’re not sure if you are crossing the line between principal residence and income property, consult a tax professional.