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  • Writer's pictureNassima Choualhi

Rental income – Tax return guide

Updated: Sep 26, 2022

If you own a rental property, you have to include all income and expenses in your tax return. In this article, we will discuss real estate. It is important to understand the types of expenses (maintenance vs. capital expenses), the eligible expenses and the impact of living in a building that you also rent.

Maintenance (current expense)

These expenses are for the purpose of maintaining the building, such as repairs and maintenance. They are deductible from rental income in the year they are incurred.

  • maintenance and repair costs to restore a building to its original condition, such as replacing all the windows or completely restoring balconies, roofs or plumbing (note that if you did the repairs yourself, you can deduct the cost of the materials, but not the value of your work)

  • loan fees and expenses incurred to obtain a mortgage or other loan to buy, maintain, or improve the building (these fees or expenses are deductible, but only in equal parts over a five-year period; if you repay the loan before the end of the five-year period, you can deduct any remaining undeducted balance in the year you repay it)

  • advertising costs associated with finding tenants

  • insurance premiums and property taxes related to the building

  • interest on money borrowed to purchase, maintain or improve the building

  • the cost of beautifying the land surrounding the building, except for sidewalks, pathways, parking areas and retaining walls if the building is used primarily for the purpose of earning rental income

  • expenses incurred for the rental of the land only

  • fees paid for the maintenance or audit of books and records

  • legal fees (except those related to the purchase or sale of the building);

  • salaries or other remuneration paid to persons engaged in the maintenance or operation of the building

  • the cost of heat, electricity and water.

Capital expenses

Unlike maintenance expenses, capital expenses are not deductible from rental income. They must be included in the capital cost of the building, as these expenses increase the value of the building. Examples include:

  • the cost of acquiring a rental property;

  • the cost of repairs or renovations required before a newly acquired older building can be leased (these repairs or renovations restore the normal value of the building if it was acquired at a lower price)

  • legal, engineering and other costs associated with the purchase of the building (land transfer taxes, relocation costs, etc.)

  • purchase price of equipment leased with the building. For example, the refrigerator, stove and furniture in a furnished rental apartment) and replacement equipment.

  • cost of adding a fireplace (this is a capital expenditure because it increases the normal value of the building);

  • cost of adding a garage (this is a capital expenditure because it creates a new asset).

  • The capital cost can then be written off as ‘capital cost allowance’ at the percentage rate for the class of the property. This allowance can then be deducted from the rental income for the year.

Personal portion of the property

If you live in one of the apartments in your building and rent out the other apartments, you must consider the personal portion of the expenses. Eligible expenses are only those used for the purpose of earning rental income.

Expenses common to the entire building, including the one you live in, are prorated based on the rented portion. Expenses specific to a rented apartment may be included at 100%. However, expenses specific to your apartment are not deductible, as they are personal expenses and not for the purpose of earning rental income.

To learn more, visit the Revenu Québec website. You can also contact us for a consultation with one of our chartered professional accountants (CPA).

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