 |
|
|
|
|
|
|
|
|
|||
 |
|||||||||||
 |
 |
 |
 |
 |
|||||||
 |
 |
 |
|||||||||
|
|
||||||||||
|
TAXFlash News from IncomeTaxCanada.net
:: Real estate was a hot commodity in 2002 with tax implications for anyone receiving rental income
:: It’s no secret that real estate was a hot commodity last year – ask any realtor and they’ll tell you 2002 was pretty decent. A lot of last year’s activity was attributable to former tenants entering the realm of real estate ownership. On the other hand, a lot of landlords and prospective landlords entered the fray as well. If you purchased your first rental property in 2002 you’ll need to do a little more work to prepare your tax return this year. If you received income from the rental of real estate, you are required to file a statement of income and expenses. This requirement applies if you are renting a house, townhouse, condo trailer-home, basement suite in your own home or even a room or two in your home. If you received rent during the year, CCRA expects you to reflect this fact on your income tax return. And to help you out CCRA has a form (T776) designed to summarize your rental income and expenses. While you’re encouraged to use it, there is no requirement to do so, although, using this form simplifies matters considerably. If you purchased a new rental property during the year, your reporting period commences on the date you acquired ownership of the property and ends on December 31 of each year thereafter – period. CCRA is not about to let taxpayers choose a non-calendar year-end to defer income and thereby tax. Indeed, just so there is no misunderstanding, where taxpayers are asked to indicate the reporting period, form T776 actually pre-prints December 31 as the end date. While summarizing your rental activity, the first thing you need to understand is the reporting method to be followed. Generally, rental income is calculated using what is known as the “accrual method”. With this method you include rents in income for the year in which they are due, whether or not they were actually received in that year. This means that if your tenant paid December’s rent in January of this year, you are still required to include such rent in your 2002 income. The same approach is true on the expense side. If you incurred an expense in December that was paid for in 2003, following the accrual method means that you would include this as a deduction against your 2002 rental income. Often, where residential rent is concerned, there are practically no rents receivable or expenses payable at the end of the calendar year. This being the case, CCRA allows the cash method of reporting to be used. As the name implies, with the cash method, rents are included in income when received and expenses are deducted when paid. In the majority of residential rent situations there is little difference between the accrual and cash methods of reporting income and expenses. The next question you need to address is who has the responsibility to report the rental income and expenses on their tax return. Not surprisingly, the rental activity should be reported by the owner of the property. Where co-ownership or joint-ownership is involved, rental income and expenses will be shared according to the share of ownership of each party. Probably the most common situation is the joint-ownership of a rental property between spouses where rental activity is split fifty-fifty. Having determined what percentage of the rental activity belongs to each owner of the property you cannot change the allocation in a future year unless there is a change in the percentage ownership of the parties. For example, assume two individuals, A and B, own an equal interest in a rental property resulting in an equal sharing of the rental income and expenses. A and B cannot change this equal sharing arrangement without one of the parties acquiring an additional share of ownership from the other. So if A is to report a 75 per cent share of the rental activity, B will be considered to have disposed of a 25 per cent interest in the property (by way of an actual sale or, perhaps by way of a gift) – a disposal that would have to be reported on his or her income tax return. When we think of rental income we generally think of a receipt in the form of cash or cheque but this isn’t the only form rental income can take. If you trade goods or services for rent, the value of the exchange will be considered rent just the same as cash or cheque. As a landlord, the form in which you choose to accept your rental income doesn’t matter - the fact that you received consideration for the rent of your property is what’s at issue. In its rental guide, CCRA provides an example of an apartment tenant who owns a truck with a plow on it. The tenant plows the parking lot each snowfall in exchange for a reduction in rent. CCRA expects the landlord to report the rent as though cash had been paid in the normal manner. An offsetting expense can then be claimed for the value of the snow plowing service. Rental income can also include payments for granting or extending a lease or sublease. Payments for cancelling a lease or sublease are also considered rent. On the other hand, a pre-payment of rent is not income until the amount has been earned. If, for example, a tenant paid rent for January 2003 in December 2002, following the accrual method this amount would not be considered rental income until 2003. Damage deposits are also not considered rent unless the landlord retains such amount when the tenant vacates the property at which time the amount would be recorded as income. So far I’ve looked at the revenue side of renting – next week, I’ll turn my attention to the all-important expenditure side reviewing what rental property owners can and cannot deduct against the rental income they receive.
Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca Income tax information offered by www.IncomeTaxCanada.net is done so without endorsement by Canada Revenue Agency (CRA) - l'Agence du Revenu du Canada (ARC) (formerly Canada Customs and Revenue Agency - l'Agence des Douanes et du Revenu du Canada CCRA-ADRC and formerly Revenue Canada – Revenu du Canada) or any Canadian government agency. The free advice is of a general nature for Canadian taxpayers seeking legal ways to reduce their personal and small business income taxes payable to the federal and provincial (or territorial) governments in Alberta, British Columbia, Manitoba, New Brunswick Newfoundland-Labrador, Northwest Territories, Nova Scotia, Nunavut, Ontario, Prince Edward Island, Quebec, Saskatchewan or Yukon. Specific taxation situations vary from taxpayer to taxpayer, province to province, territory to territory. The free tax advice here is only a general guide. Canadians should always seek individual guidance on accounting rules and tax laws from knowledgeable accountants and lawyers. To prepare your income tax return online and NetFile your Canadian income taxes electronically in English or Francais, please visit www.ufile.ca or www.impotexpert.ca websites. Additional information on financial products and services for Canadians can be found at www.CanadianCreditCenter.com. |
|||||||||||
Jim Maroney