Personal Investor: No tax vacation for cottage rental income
It’s cottage rental season and that could mean big bucks for property owners wanting to cash in on care-free vacationers. It’s a great way to offset the cost of owning a cottage and generate income, but it’s important to know the Canada Revenue Agency (CRA) doesn’t take a vacation.
All that income must be reported and added to other income generated throughout the year. That means total income for the vacation property owner could be pushed into a higher tax bracket.
Fortunately, expenses related to the cottage can be claimed to offset the tax bill. Those expenses range from promoting the property online to maintenance and repairs.
However, things get complicated when cottage owners use the property for part of the year. As an example, Turbo Tax presents a scenario where a cottage is rented out for 13 weeks during the summer and used by the owners for the rest of the year:
- Because the cottage was rented for a quarter of the year (13/52) annual expenses such as property taxes and insurance may only be deducted at the ¼ rate. If the insurance on the cottage is $500/year, when it’s time to prepare your tax return, you may only claim $125 as a deduction.
- Depending on your electricity billing cycle, the math may be simpler for this one. You can claim the full power/hydro expense for the days the cottage was rented.
- If you pay someone to tend to the yard during the rental period, save the receipts. That’s an eligible expense at tax time. If you take on these duties yourself, your labour is not a qualifying expense although you could claim out of pocket expenses such as gas for a mower or repairs. If you fix the broken air conditioner yourself, you may only claim the cost of parts, not your own labour. If you pay a professional, the entire cost may be deducted.
- Expenses such as the cost of significant repairs and maintenance or the purchase of an appliance are considered to be capital costs, which are deducted over time at a rate set by CRA.
Things can get really complicated if you want to use your cottage as a principal residence at some point. Capital gains on a principal residence are not taxed but if the CRA considers your cottage an income-generating business, the capital gains exemptions could be in question. It might be a good idea to consult a tax professional.