0
Part 6
Rental Income and
Expenses
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PART VI
REAL ESTATE RENTALS
If a taxpayer received income from renting real estate, he/she has to file a statement of Real
Estate Rentals (Form T776). If the taxpayer has more than one rental property, the preparer
should complete a separate T776 form for each rental property. The Rental Statement can be
cloned. See Guide T4036 - Rental Income and Expenses.
Start by going to the T776 Summary Screen. Press <F4> , 776 or expand at Line 126 on page 1
of the T1.
Expand on the address line to enter information about the first rental property.
By default, the dates
shown are for the
full calendar year.
These dates can be
changed if this is the
first or last year of
rental.
By default, it is
assumed that the
taxpayer is the sole
owner of the rental
property (100%
ownership). If there
are other owners,
click on the
Taxpayer is field and
pull down a menu
indication other
options.
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Start/End of Fiscal period - The usual Start and End of the Fiscal period is the calendar year.
This may be different if this is the first year that the taxpayer has started renting a property or it
is the final year.
Name of Business – If the rental business does not have a name, enter the name of the owner.
The address and Postal Code is that of the owner unless the rental business has a separate office
away from the home of the owner.
Overall Taxpayer Ownership – This figure will be 100% if the taxpayer is the Sole Owner. If
the taxpayer has a co-owner, CanTax will automatically adjust this figure based on the
percentage owned by any co-owners when that information is entered in the section Details of
co-owners and partners.
Taxpayer is……. If someone else, including the taxpayer’s spouse, owns a share of the property
that is being rented, select “A CO-OWNER” from the pull down menu.
Details of Co-Owners – If the taxpayer has a “A CO-OWNER”, the name and percentage
owned by the co-owner(s) can now be entered.
If the co-owner is the taxpayer’s spouse, only the percentage owned by the spouse need be
entered. The spouses name will automatically be entered on this part of the form if it has already
been entered on the INFO screen. If the spousal returns are coupled, the T776 form will
automatically be completed for the spouse as well.
Enter percentage
owned by spouse.
If the co-owner is someone other than the spouse, the name, SIN and address of the other
owner(s) and the percentage of ownership will have to be entered.
When the net income from the rental property is calculated, the amount that will automatically be
reported on the taxpayers return is determined by the percentage ownership.
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Income – Report the total income for the year in this section. Generally only income from one
property is reported here. Report the total income even though the taxpayer may have a coowner. After the expenses are deducted, CanTax will calculate the amount of income or loss to
be reported by the taxpayer.
Expenses – Enter the total expenses in this section. If the property is fully available for rent
then all the expenses can be claimed.
If the taxpayer rents part of his/her personal residence, he/she will only be able to claim a portion
of the expenses that relate to the whole house. In such a case, the percentage of the property that
is the personal portion must be entered in the field Personal portion percentage. CanTax will
automatically calculate the personal portion and enter it in the Personal portion column.
Personal portion
percentage is
usually calculated
by using the area of
the personal space
as a percentage of
the area of the whole
house.
Some expenses may relate only to the rented portion of the property and thus no personal portion
should be deducted. For example, in the situation above, the taxpayer spent $435.98 on
maintenance and repairs to the siding on the outside of his house and $276.34 for repairs
exclusively to his apartment. This is a total of $712.32 (see line 8960 above). Since 60% has
been entered as the personal portion, CanTax will automatically calculate a personal portion of
the total amount (60% of $712.32 = $427.39) and enter it in the Personal portion column. This is
not correct since the taxpayer is entitled to claim the full amount of the repairs that were
exclusively for the apartment. To make the proper claim, the preparer must calculate the personal
portion of the repairs to the whole property (60% of $435.98 = $261.58) and enter it in the
Personal portion column. (You will have to override to enter that amount).
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Generally, a taxpayer can deduct any reasonable expenses incurred to earn rental income.
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The two basic types of expenses are:
 Current Expenses
 Capital Expenses
Current or operating expenses are recurring expenses that provide a short-term benefit. For
example, a current expense is the cost of repairs made to keep a rental property in the same
condition as it was when it was acquired. Current expenses can be deducted from gross rental
income in the year they were incurred. Capital expenses provide a benefit that usually lasts for
several years. For example, costs to buy or improve property are capital expenses. Generally, a
taxpayer cannot deduct the full amount of these expenses in the year they were incurred. Instead,
he/she can deduct their cost over a period of several years as capital cost allowance (CCA).
Current or Capital Expenses?
Renovations and expenses that extend the useful life of a property or improve it beyond its
original condition are usually capital expenses. However, an increase in a property’s market
value because of an expense is not a major factor in deciding whether the expense is capital or
current.
Operating Expenses (Current Expenses)
Operating expenses are recurring expenses that provide a short-term benefit. An example of a
current expense is the cost of repairs made to keep a rental property in the same condition it was
in when purchased.
Operating expenses that can be deducted from rental income:
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accounting fees,
Expenses that cannot be deducted from rental
advertising costs,
income:
commissions to agents to collect rents,
condominium fees,
 the principal portion of mortgage payments,
financing fees,
 penalties from tax assessments, and
insurance premiums,
 the value of the taxpayers own labour for
services he/she provided.
interest expenses,
landscaping costs,
lease cancellation payments,
legal expenses to prepare leases or collect overdue rents,
Management and administration fees
maintenance and repairs,
mortgage penalties,
Capital expenses can include:
motor vehicle expenses,
 the purchase price of rental property;
office expenses,
 legal fees and other costs connected with buying
property taxes,
the property; and
salaries and wages,
 the cost of furniture and equipment that is being
tax return preparation fees, and
rented with the property.
utilities.
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Financing Fees on Rental Property
A taxpayer can deduct certain fees incurred to get a mortgage or loan to buy or improve rental
property. These fees can be claimed over a five year period and include:

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mortgage applications, appraisals, processing and insurance fees;
mortgage guarantee fees;
mortgage broker and finder's fees; and
legal fees related to mortgage financing but not for the purchase of the property.
Divide the sum of the above fees by five to give the allowable claim each year. If the mortgage
or loan is repaid before the end of the five-year period, he/she can deduct the remaining
financing fees at that time.
Interest Expenses - A taxpayer can deduct interest on money borrowed to buy or improve
rental property. He/she can also deduct interest paid to tenants on rental deposits. He/she can
deduct the mortgage interest but not the monthly mortgage payments.
Landscaping - Landscaping can be claimed as a current expense if the building is used
primarily for earning rental income
Maintenance and Repairs - A taxpayer can claim expenses for maintaining and repairing a
rental property. However, if the expense provides a lasting benefit or improves the property
beyond it original condition it may not be able to be claimed as a maintenance or repair expense.
Such expenditures will be considered Capital Expenses and must be considered as part of the
original cost of the property. These may be able to be claimed over a period of time as Capital
Cost Allowance.
If a taxpayer purchases an older building and renovates it to make it suitable to rent, the cost of
the work is a capital expense. This is the case even though one would usually treat these costs as
current expenses.
Soft Costs - Certain costs (such as interest, legal and accounting fees, and property taxes)
incurred while a rental property is under construction, renovation or alteration are referred to as
"soft costs” and are usually treated as Capital Cost and added to the cost of the asset. These soft
costs related to the building only may be deducted as a current expense to the extent of income
reported from that building.
Modifications to Buildings to Accommodate Disabled Persons - If a taxpayer
renovated his/her rental property to accommodate disabled persons, the outlays and expenses
incurred to make eligible disability-related modifications to an existing building is fully
deductible in the year they are incurred instead of being added to the capital cost of your
building. Eligible disability-related modifications are changes made to accommodate
wheelchairs, such as hand-activated, power door openers; interior and exterior ramps; widening
doorways; and alterations to bathrooms.
Legal and Survey Fees related to the purchase of a rental property - These fees are a
capital expense and as such must be added to the capital cost of the property. They cannot be
claimed as a current (or operating) expense.
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Motor Vehicle Expenses as a Rental Expense
A Taxpayer may be able to deduct reasonable motor vehicle expenses as rental expenses
according to the following criteria.
One Rental Property – Must meet all of the following
 The property is located in the general area (i.e., locality, city or town) where the taxpayer
lives,
 He/she personally does part or all of the repairs and maintenance on the property, and
 He/she incurred the motor vehicle expenses to transport tools and materials to the rental
property.
Note: A single property with several units is ONE Rental Property
If a taxpayer owns only one rental property, motor vehicle expenses incurred to collect rent are
considered personal expenses and are not deductible.
Two or More Rental Properties – Must meet any one of the following
 He/she collect rents,
 He/she supervises repairs, or
 He/she generally manages the properties.
In this case, the vehicle expenses are allowed whether the rental properties are located in or
outside the general area where the taxpayer lives. However, he/she can deduct motor vehicle
expenses only if the properties are located in at least two different sites away from his/her
residence. If one of these rental properties is in the same building as the taxpayer’s personal
residence, it does not count as a different site for the purpose of deducting motor vehicle
expenses.
To claim Motor Vehicle expenses, expand a line 9281 on the T776 form to go to the AUTO
screen or press <F4>, AUTO. Calculate the vehicle expenses the same way as on the T777A.
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Notice that the AUTO screen has another section at the bottom of the screen called Allocation of
automobile expenses. This section is particularly useful if the same vehicle is used for earning
income from more than one source. Thus if the taxpayer is claiming vehicle expenses for
employment, business and rental income, the preparer could use the AUTO form and allocate a
percentage to each form.
Allocation of automobile expenses
It is essential that the preparer allocate the expenses to a form or else no expenses will be
claimed. Even if the taxpayer has only one property, the preparer must select T776 and 100% as
the form where the expenses will be posted. If he/she has two properties using two T776 forms,
the preparer must allocate a percentage to each property.
If you click in the Form field on the left hand side of the screen, a down arrow will appear;
Select the form to allocate the expenses to and then enter the percentage to be posted on that
form. In the situation below, 60% of the allowable expenses are being allocated to the first rental
property on T776 – Statement of Real Estate Rentals and 40% is being allocated to the second
rental property on form T776#02.
Bottom of AUTO screen
The AUTO form can be used rather than T777A when claiming auto expenses as an
employee. If you do, be sure to allocate the percentage of the allowable expenses that apply to
employment income and must be posted to the T777. If all the allowable vehicle expenses
are for employment income, it seems the T777A form is more appropriate.
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After the automobile expenses are calculated, CanTax will post them back to the T776 form. If
the taxpayer is the sole owner of the rental property, the CCA will be posted to Line 9936 and
the Other expenses will be posted to Line 9281. If the taxpayer has a co-owner, the CCA will be
posted to Line 9936 but the Other expenses will be posted below Line 9369 after the Coowners share has been deducted.
T776
Other vehicle expenses
CCA
Capital Cost Allowance (CCA) on Building, Furniture and Equipment
Line 9936 - A taxpayer cannot claim the full cost of purchasing a rental building, furnishings or
equipment in the year that they were purchased. He/she can claim an amount for CCA on a
declining balance basis on those items each year based on the class of the item. Also in the first
year that the item is purchased, only one-half of the normal CCA can be claimed (first year rule).
No amount of CCA can be claimed for the land on which a rental building sits.
To claim CCA, the capital cost of the building, furniture and equipment must be determined. In
most cases, the capital cost of the property is what the taxpayer paid for it plus legal fees, survey,
valuation costs, delivery charges and GST/HST less any grants or subsidies from a government
agency. It does not include the value of the taxpayer’s own labor or free labor from friends.
CCA Restriction - Capital Cost Allowance cannot be claimed to create or increase a rental loss.
If the taxpayer has more than one rental property, the overall net rental income must first be
calculated before CCA can be claimed. Combine the rental income and losses from all
properties, even if they belong to different classes.
For purposes of CCA, each rental property with a capital cost of $50,000 or more must be placed
in a separate CCA class.
The taxpayer must keep a record of the Capital Cost of the building. This may have to be used
later if the property is sold or converted to personal use.
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CCA Classes –Below is a list of the most common classes and the corresponding rate for that
class related to a rental property.
Class 1 (4%)
Most buildings bought after 1987 including components such as wiring, plumbing, heating and
cooling systems.
Class 3 (5%)
Most buildings, including components, bought before 1988.
Class 6 (10%)
Frame, log, stucco on frame, or galvanized or corrugated metal buildings that do not have any
footings below the ground. Class 6 also includes fences and greenhouses.
Class 8 (20%)
Property not included in any other class. Some examples are furniture, machinery, photocopiers,
calculators, musical instruments, refrigeration equipment, telephones and tools costing $200 or
more.
Class 97 (0.00%)
Land
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Determining the Capital Cost of a building for claiming CCA – When a taxpayer purchases a
building to rent, he/she generally purchases the land that the building sits on. As mentioned
previously, CCA cannot be claimed on land. The cost of the land and related expenses must be
deducted from the total cost to determine the Capital Cost of the building for CCA purposes.
Example – During the year, a taxpayer purchased a Class 1 building and land at 124 West Street,
Badger, NL for $156,900.00. He immediately began renting the building. The value of the land
at the time was $32,000.00. The taxpayer incurred the following expenses related to the
purchase: Legal Fees $765.00, Survey Fees $235.00 and Appraisal fees $175.00. What is the
Capital Cost of the building?
Total Cost (Including Expenses)
Less: Land
$158,075.00
32,000.00
Portion of expenses related to land
32000
126,075.00
 765.00  235  175  $239.64
Less: Land Expenses
239.64
156900
Capital Cost of Building
125,835.36
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To claim CCA on the building, the capital cost must be entered on the Capital Cost Allowance
screen. To go to that screen, expand at Line 9936 on the T776 form.
When the
information
about the
property is
entered in Area
C below, it will
then be posted
to Area A
Enter information here about the building. Note that the Class is
1 and, since there are no other Pools for class 1, call this Pool 1.
You can use any Pool number you like. The number you use
will be important only if you purchase more items of that same
class that you wish to add to the same column in Area A.
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Example – The taxpayer purchased furniture for $2,345.98 (HST included) to furnish the rental
building in the previous example. Later he purchased additional furniture for $1564.00. The
Capital Cost must be also be entered on the Capital Cost Allowance screen. Furniture is in Class
8. Note that these purchases can also be called pool 1 since there are no other pools in class 8.
When the information is reported in Area B it is automatically posted to Area A.
CCA
When the CCA has been calculated it is
posted to Line 9936 on the T776 Screen
Additions to Cost of Building – In some cases the Capital Cost of a building may be greater
than the original price paid for the building. This will be the case when expenses are incurred
that give the building a lasting benefit, therefore the expenses could not be claimed as current
expenses. These expenses must be added to the Capital Cost of the building. If capital costs are
incurred on an existing building, enter the amount in Area C of the Capital Cost Allowance
schedule. Make sure that the same class and pool number used are the ones used for the original
building. The taxpayer must keep a record of any additions to a building. There may be tax
implications if the property is sold or converted to personal use.
Example – A taxpayer has a Class 1 building listed in Pool 1 that has a UCC of $132,456.00 at
the end of the previous year. This year he spent $4,500.00 to upgrade the siding on his house.
The entry in Area C would be as below.
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Note that the Class is 1 and the Pool is 1.
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Area A would be as below.
Recapture of CCA - CRA allows a claim for CCA based on the assumption that the value of the
property decreases over time. In reality, some properties (especially buildings) do not decrease in
value or do not decrease as much as the CCA that has been claimed. If the property is sold or
converted to personal use, and the selling price or fair market value is higher than the UCC
(Undepreciated Capital Cost), the taxpayer may have to include some of the CCA that was
claimed back into income. This amount to be included in income is called recapture. It will be
posted to Line 9947 of the T776.
For recapture purposes, the selling price cannot
exceed the purchase price. If the selling price is greater
than the original purchase price, enter only the original
purchase price as Disposal Proceeds on the Capital
Cost Allowance Schedule. In that case the Recapture
will be the full amount of the CCA claimed, but not
more. If the selling price is greater than the original
price, the taxpayer may have to include the difference
in income as a Capital Gain. Capital Gains and Losses
will be discussed in Part 8.
Example – A taxpayer owned a rental property (not
including the land) that was originally purchased for
$98,700.00. He has been claiming CCA over the years
and at the end of last year the UCC (Undepreciated Capital Cost) was $76,654.00. This means
that over the years, assuming there have been no other additions to the building, he has claimed
$22,046.00 in CCA. This year he sold the property for $91,456.00 (Disposal proceeds). He will
have to include a recapture of $14,802.00 as income ($91,456.00 - $76,654.00 = $14,802.00)
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To report the sale, Area E on the Capital Cost Allowance Schedule must be completed.
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The information from Area E will be posted to Area A and the recapture calculated.
Top of CCA Schedule
The Recaptured Capital Cost Allowance will be posted to Line 9947 of the T776 form.
Disposal proceeds greater that original Capital Cost - If the selling price is greater than the
original cost, enter the original Capital Cost as Disposal Proceeds rather than the actual selling
price. For the example on the previous page that would be $98,700.00.
The recaptured capital cost allowance would then be calculated as the full amount of CCA that
has been claimed, $22,046.00.
Limits on CCA – CCA cannot be used to create or increase a rental loss. Before any CCA can
be claimed, rental income from all properties must be combined. If, after they are combined,
there is still a profit, the taxpayer can claim only enough CCA to reduce the rental income to
zero.
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Claim CCA on Furniture before claiming CCA on Building – Because of the concern with
recapture of CCA on buildings, it is to the taxpayer’s advantage to claim CCA on furniture first
before considering claiming CCA on any building. CanTax will automatically limit the CCA
claim but the preparer will have to decide which amount to claim first – CCA on a building or
CCA on the furniture or a combination of both. The claim for CCA on a building may have to be
overridden.
Example – A taxpayer has a net rental income of
$2,037.00. CanTax claims that amount as CCA.
However when the preparer looks at the CCA
schedule, she notices that the program has claimed the
full amount of the allowable CCA on the building
(class 3) and none on the furniture (class 8). To correct
the situation, the preparer should first override the
CCA claim of the building to zero. The CCA for the
furniture will then be calculated. If that is not enough
to reduce the income to zero, and the taxpayer wishes
to claim CCA on the building, enter the balance in the
CCA field for the building. Remember the total CCA
claim cannot exceed the net rental income before CCA
is claimed.
Terminal Loss – In some cases, the selling price of the building might be lower than the UCC of
the building at the beginning of the year. In that case the taxpayer has not claimed enough CCA
to account for the depreciation in value of the building. If this happens, the taxpayer can claim
the difference between the UCC and the selling price as a Terminal Loss. This amount will be
posted to Line 9948 of the T776. A terminal loss cannot be claimed on land.
Example – A taxpayer owned a Class 3 building that he purchased several years ago for
$46,876.00. The UCC at the end of last year was $31,198.00. The land was leasehold. This year
he sold the building for $25,897.00 and had legal fees of $593.00 associated with the sale.
His actual Proceeds of Disposal was $25,897.00 - $593.00 = $25,304.00
His Terminal Loss is $31,198.00 - $25,304.00 = $5,894.00
Enter the Disposal proceeds in Area E of the CCA Schedule
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Proceeds will be posted to Area A
Note: Yes must be
selected for Terminal
Loss? if the building is
sold.
The Terminal Loss is posted to Line 9948 on the T776.
Change of Use (Fair Market Value - FMV)
When there is a change in use of real estate, either from rental to principal residence, or from
principal residence to rental, there is a deemed disposition. The owner is deemed to have
disposed of the property (land and building), and to have immediately reacquired it, with both
transactions done at fair market value.
Changing ALL your principal residence to a rental property
When a taxpayer changes his/her principal residence to a rental property, he/she can make an
election not to be considered as having started to use the principal residence as a rental property.
This means he/she will not have to report any capital gain when the use is changed back to
personal or the property is sold
This will be discussed in more detail in the Part 8 – Capital Gain
Capital Cost of rented portion of personal residence for CCA– Many taxpayers purchase a
house and rent a portion of it while living in the other part. They then may wish to claim CCA on
the rented portion. If so, the Capital Cost of the rented portion of the house must first be
determined. To do that the cost of the land and related expenses must first be deducted. Then
deduct the cost and related expenses of the personal portion. The balance is the Capital Cost of
the rented portion.
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Example: A taxpayer purchased a house and land with a basement apartment. The purchase
price was $146,800.00 and the expenses associated with the purchase were $865.00. The value of
the land at the time was $32,000.00. The apartment is 40% of the floor space of the house. What
is the Capital Cost of the apartment on which the taxpayer can claim CCA?
Total Cost
Less: Cost of Land
Related Expenses
Cost of Building
Less: Personal Portion
Capital Cost of Apartment
$147,665.00
32,000.00
188.55
115,476.45
69,285.87
46,190.58
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Enter this amount in Area C of the CCA Schedule.
Expenses related to land
32000
 865.00  188.55
146800
(60% of 115,476.45 Cost of building)
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Converting Part of Personal Residence to Rental
Many times a taxpayer decides to convert part of his/her personal residence into a rental property
after living in the house for a number of years. In this case the determination of the Capital Cost
of the rental portion is based on the higher of Fair Market Value or the Actual Cost of the
property. Generally, the figure used will be the FMV since most properties increase in value
over time.
If the taxpayer has incurred expenses to renovate the apartment before renting, these expenses
must be considered when determining the FMV of the whole property. Renovations cannot be
claimed as expenses against rental income; maintenance and repairs can.
Example: A taxpayer purchased a house in 1978 for $78,908.00. His legal and survey fees were
$476.09. He estimates that the value of the land at that time was $7,500.00. Over the years he has
spent another $16,000.00 to upkeep the property. This year he decided to convert part of his
home into a basement apartment. He spent $3,786.00 in renovations to make the apartment
suitable to rent. The apartment occupies 35% of his house. When the renovations are complete,
he estimates the FMV of the building to be $152,678.00 and the land to be $27,000.00.
Actual Cost of Building
$78,908.00 - $7,500.00 + $476.09 + $16,000.00 + $3,786.00 = $91,670.09
FMV of Building = $152,678.00 (higher amount)
The Capital Cost of the Apartment is $53,437.30
35%  $152,678.00  $53,437.30
Should a Taxpayer claim CCA on personal residence? – If a taxpayer rents part of his/her
personal residence, there may be tax implications when the property is sold or converted back to
personal use. The taxpayer may have to include a recapture of CCA and a capital gain in
income. The taxpayer can, however, avoid including either of these in income at the time the
property is sold or converted back to personal use.
Recapture - If the taxpayer does not claim any CCA on the rented portion of the house then,
obviously he/she will not have to report any recapture of CCA. Clients should be made aware
that claiming CCA on a rental property may avoid or reduce taxes in the short term but may in
fact cost more when the property is sold.
Capital Gains – A Capital Gain occurs when an income producing property is sold for more
that the original purchase price or is converted back to personal use and the fair market value is
greater than the original purchase price. We will discuss Capital Gains and Losses in Part 8
The taxpayer can avoid paying taxes on a capital gain if:
 The part of the taxpayer’s personal residence that is rented is minor compared to the whole
house
 No structural changes are made to the property to make it more suitable for renting; and
 No CCA has been claimed on the house (CCA on furniture is OK)
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Claiming CCA when rental property and/or furniture are owned jointly – Form T776
calculates the CCA on the building or furniture on Line 9936, which is after the co-owner’s share
has been deducted. Thus when completing the CCA Schedule, the preparer must enter only the
share of the Capital Cost owned by the taxpayer whose return is currently being completed. For
example, a couple that rents part of their house, determine that the Capital Cost of the rental
portion of the house is $23,786.00 and the cost of the furniture is $2,345.00. These amounts must
be split and half reported on each spouses return as Cost of Additions.
Renting below fair market value - A taxpayer can deduct expenses only if they are incurred to
earn income. If a taxpayer loses money because he/she is renting a property to a relative for a
lower rate than he/she would rent it to other tenants, a rental loss cannot be claimed. When rental
expenses are consistently more than rental income, the taxpayer may not be allowed to claim a
rental loss because the rental operation is not considered to be a source of income. However,
he/she can claim a rental loss if he/she were renting the property to a relative for the same rate as
would be charged other tenants and there is a reasonable expectation of profit.
More than one rental property reported on a single T776 – Generally, the income and
expenses for each rental property should be reported on separate T776 forms. This is particularly
true if the percentage ownership is different for each property or the percentage of personal
verses rental is different for each property. Using separate T776 forms will also help keep track
of CCA claimed on each property and its contents.
Some landlords, however, combine all their rental income and expenses from all properties and
wish to report it on one T776 form. This is acceptable as long as the percentage ownership is the
same for each property. If one on the properties is part of the landlord’s personal residence,
however, that property will have to be reported separately unless he/she provides expenses
related only to the rental portion.