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Renting Out My Cottage, Tax Questions

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  • Sep 23rd, 2010 10:27 pm
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Sr. Member
Dec 9, 2007
537 posts
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Renting Out My Cottage, Tax Questions

So I own a cottage and plan to use it myself most of the time but would like to rent it out 3-4 weeks a year. To try to do things right I want to declare this income to the government on my taxes as income and deduct appropriate expenses. Here is my thoughts/ assumptions and I would like to get the opinions of others on here:

- Cottage season is basically June - Sept (at best) so roughly 1/3 of the year.
- I would like to rent it out for 4 weeks so approximately 1/4 of the cottage season (4/16 weeks) so based on this 25% of the cottage expenses should be used to offset the income and 75% of the expenses are for my own personal enjoyment
- Expenses would including things like phone, utilities, etc. but since they span over the full year I would assume 25% of the year costs would be for earning income since I need to pay those in the winter to be able to have the opportunity to rent during the summer season. Is that fair or would Revenue Canada only allow expenses for the 4 weeks in the summer?
- I know that repairs and property upgrades would be capital expenditures and wouldn't allow you be in a loss situation but could be used to lower taxable income so I think that is fine but the same question of what percentage could be used would hold true, 25% (4/16) or ~4% (4/52).
- My big question is about interest expenses, can interest expense on this actually allow you to take a loss that could be applied to my personal income? Or is it similar to capital expenditures where it can reduce taxable income to 0 but no lower? Also the percentage of interest paid in the year that can be used needs to be determined 25% or 4% (same as above).

Here is a very basic sample income statement that hopefully illustrates my questions:

income earned - $4,000

expenses
phone - $ 360
interest - $15,000
electricity - $600
insurance - $900
taxes - $2500

at 25% - rental expenses are $4,840
at 4% - rental expenses are $775

In one case this means i am running the cottage rental at a loss of $840 with no income tax (potential an income tax break for my other personal income tax) and the other case I am generating a profit of $3225 and would be subject to paying income tax at a high level.

Which is the right scenario?
16 replies
Deal Addict
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Nov 22, 2002
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All your expenses should be pro-rated based on how many weeks out of the year that the cottage is not for personal use.
Yes, if overall you are taking a loss, then it can be used to offset your regular employment income.

My inlaws have a place in Whistler and for the past 20 years, every year it takes a loss.
But they'll get nailed for capital gains in the future when they sell.
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Nov 22, 2002
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I failed to answer your question. You can only deduct 4/52 of your annual expenses.
You can expense repairs. Upgrades need to be capitalized.
For example, if your carpets need to replaced and you replace it with the same carpet (quality), it can be considered an expense.
But if you replace it with hardwood floors or a much higher quality carpet, then it should be capitalized.
Upgrade vs replacement. You need to make the distinction.
[OP]
Sr. Member
Dec 9, 2007
537 posts
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Magoomba wrote:
Sep 9th, 2010 1:21 pm
I failed to answer your question. You can only deduct 4/52 of your annual expenses.
You can expense repairs. Upgrades need to be capitalized.
For example, if your carpets need to replaced and you replace it with the same carpet (quality), it can be considered an expense.
But if you replace it with hardwood floors or a much higher quality carpet, then it should be capitalized.
Upgrade vs replacement. You need to make the distinction.

So if it is closed up for the year 8 months of the year (not used by anyone myself or a renter) I can't share the costs of the closed up period between my personal expenses and the rental expenses?
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whodaphucru wrote:
Sep 9th, 2010 1:54 pm
So if it is closed up for the year 8 months of the year (not used by anyone myself or a renter) I can't share the costs of the closed up period between my personal expenses and the rental expenses?

I believe if you can prove that it is available for rent throughout the rest of the year (rental ads, etc) but simply didn't garner any rentals, then you can change the number of weeks of personal use vs rental use.
If you simply leave it vacant and make no attempt to rent it out during the rest of the year, then it's still personal use.
[OP]
Sr. Member
Dec 9, 2007
537 posts
12 upvotes
Magoomba wrote:
Sep 9th, 2010 6:58 pm
I believe if you can prove that it is available for rent throughout the rest of the year (rental ads, etc) but simply didn't garner any rentals, then you can change the number of weeks of personal use vs rental use.
If you simply leave it vacant and make no attempt to rent it out during the rest of the year, then it's still personal use.

Great, thanks for the replies.
Sr. Member
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Aug 25, 2005
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Have you considered the principle residence (PR) exemption and its usability on the cottage if you chose to rent it out?
I'm not 100% but using your cottage as rental property may limit your ability to claim the cottage as your PR when you sell it and thus you will pay tax on capital gains.
Of course, if you plan on using the PRE on another property, then there's no concern.
Sr. Member
Jul 29, 2009
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They're using it for 2 months out of the year. I doubt it's their principal residence.
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Jan 1, 2009
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Vancouver
1)Rental Expenses will be pro-rated to rental use (4/52 weeks) as was mentioned before. Fixed property holdings cost such as property taxes and insurance are prorated as such.

2)Renting the property for 4 weeks out of the year will not result in a complete change in use of personal residence to income producing. This is similar to renting out basement suites in the principal residences of landlords, who ordinarily inhabit the residence. Therefore, no deemed disposition and reacquisition should apply.

3)Claiming annual rental expenses which are not matched to rental income during those 4 weeks may effectively create a change in use, as your intention is to claim expenses as if the property was an annual rental but remained vacant for most of the year. This is not a suggested route due to the future nullification of a large part of your primary residence capital gains exemption. Alternatively, you can always rent this property for 4 years annually and maintain its principal residence status with a Section 45(2) election, so long as no other property of yours is classified as a principal residence during that 4 year period.
Member
Aug 16, 2004
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Cypherus21 wrote:
Sep 10th, 2010 1:06 am
3)Claiming annual rental expenses which are not matched to rental income during those 4 weeks may effectively create a change in use, as your intention is to claim expenses as if the property was an annual rental but remained vacant for most of the year. This is not a suggested route due to the future nullification of a large part of your primary residence capital gains exemption. Alternatively, you can always rent this property for 4 years annually and maintain its principal residence status with a Section 45(2) election, so long as no other property of yours is classified as a principal residence during that 4 year period.

I disagree. Like Magoomba said, OP should be able to rent out the cottage for all 9 months that he/she is not using it, even if a renter can not be found. Putting up ads on kijiji or craigslist should be enough to satisfy the CRA that you intend to use it as a rental that entire time. And if you happen to find someone who wants a cabin in the winter (maybe for hunting or ice fishing?), all the better! This way OP could claim 75% of the expenses, resulting in a tax a deduction of over $10,000 per year. Depending on OP's personal income, the tax returns would probably be a lot higher than 50% of the gain in property value. Plus, if OP has a mortgage on a primary residence, a cash dam could be setup with the rental property to gradually shift the mortgage to a tax deductible loan.
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bjserink wrote:
Sep 10th, 2010 2:35 pm
I disagree. Like Magoomba said, OP should be able to rent out the cottage for all 9 months that he/she is not using it, even if a renter can not be found. Putting up ads on kijiji or craigslist should be enough to satisfy the CRA that you intend to use it as a rental that entire time. And if you happen to find someone who wants a cabin in the winter (maybe for hunting or ice fishing?), all the better! This way OP could claim 75% of the expenses, resulting in a tax a deduction of over $10,000 per year. Depending on OP's personal income, the tax returns would probably be a lot higher than 50% of the gain in property value. Plus, if OP has a mortgage on a primary residence, a cash dam could be setup with the rental property to gradually shift the mortgage to a tax deductible loan.

You should follow up with the change in use rules of the income tax act, as intending to use the condo as rental and posting ads will provide enough substantiation for CRA to argue its change in use from personal to income producing. As such, future capital gains will begin to accrue on the property from the date of change in use unless a S. 45(2) election is made to the CRA to preserve its primary residence status for another 4 years while it's rented out partially or completely. From my experience, no accountant would claim match annual expenses to income that is earned out for just part of the year, unless the property is strictly for rental and is left vacant, rather than a primary residence.
[OP]
Sr. Member
Dec 9, 2007
537 posts
12 upvotes
Cypherus21 wrote:
Sep 11th, 2010 3:16 pm
You should follow up with the change in use rules of the income tax act, as intending to use the condo as rental and posting ads will provide enough substantiation for CRA to argue its change in use from personal to income producing. As such, future capital gains will begin to accrue on the property from the date of change in use unless a S. 45(2) election is made to the CRA to preserve its primary residence status for another 4 years while it's rented out partially or completely. From my experience, no accountant would claim match annual expenses to income that is earned out for just part of the year, unless the property is strictly for rental and is left vacant, rather than a primary residence.


This is not my primary residence (live in the GTA) and it is highly unlikely that I would ever use this as my primary residence in the future, I will likely leave it to my children when I die and would maintain a primary residence in the city until then. If I sold it today I would be subject to Capital Gains tax so not really about the primary residence arguments above.

Given that and the fact that I have no intention of using this during the winter perhaps I will try to rent it out during the winter, if I get a renter great otherwise I can claim those expenses (I think from the discussion above). Am I missing something here? From a tax return perspective I am in the highest tax bracket so any tax relieve would be significant.
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whodaphucru wrote:
Sep 13th, 2010 12:08 am
This is not my primary residence (live in the GTA) and it is highly unlikely that I would ever use this as my primary residence in the future, I will likely leave it to my children when I die and would maintain a primary residence in the city until then. If I sold it today I would be subject to Capital Gains tax so not really about the primary residence arguments above.

Given that and the fact that I have no intention of using this during the winter perhaps I will try to rent it out during the winter, if I get a renter great otherwise I can claim those expenses (I think from the discussion above). Am I missing something here? From a tax return perspective I am in the highest tax bracket so any tax relieve would be significant.
With regard to the primary residence issue, then ignore it. Based on prior queries I assumed it was your primary residence. However, change in use still applies if a vacation property is converted to income producing under a rental arrangement. That's why it was suggested that if you were going to rent it out, then do it under a time share basis. That the 4 weeks out of the year that you rent it out, for example, would not constitute a change in use as you do not intend to use the cottage exclusively as a rental property. For instance, this is common in Whistler where the vacant personal properties are rented out for a couple weeks in the summer season. In my experience working with such files, rental expenses are still pro-rated to rental use, meaning expenses during months when the property is really vacant for your personal use are not deductible. Otherwise, CRA would engage you that the rental property does not have a reasonable expectation of profit.

Since it seems you'd really like to supplement your income, consider a change in use and rent it out like an annual time share. That way you can deduct annual expenses less the few personal days you use it. But you'd have to claim a deemed capital gain on the change in use (tip: wait for real estate to drop).
[OP]
Sr. Member
Dec 9, 2007
537 posts
12 upvotes
Cypherus21 wrote:
Sep 15th, 2010 10:04 pm
With regard to the primary residence issue, then ignore it. Based on prior queries I assumed it was your primary residence. However, change in use still applies if a vacation property is converted to income producing under a rental arrangement. That's why it was suggested that if you were going to rent it out, then do it under a time share basis. That the 4 weeks out of the year that you rent it out, for example, would not constitute a change in use as you do not intend to use the cottage exclusively as a rental property. For instance, this is common in Whistler where the vacant personal properties are rented out for a couple weeks in the summer season. In my experience working with such files, rental expenses are still pro-rated to rental use, meaning expenses during months when the property is really vacant for your personal use are not deductible. Otherwise, CRA would engage you that the rental property does not have a reasonable expectation of profit.

Since it seems you'd really like to supplement your income, consider a change in use and rent it out like an annual time share. That way you can deduct annual expenses less the few personal days you use it. But you'd have to claim a deemed capital gain on the change in use (tip: wait for real estate to drop).
Two follow up questions:

1) Perhaps I am missing something here I thought vacation homes or any property except for your primary residence was subject to Capital Gains Tax when you sell it. I am pretty sure if I sold my cottage tomorrow and made a profit I would have to pay Capital Gains Tax. Is this not correct?

2) I thought that there was a Supreme Court ruling or something like that which stated that you don't have to have a reasonable expectation of profit unless the business is Hobby (clearly I am paraphrasing) . Renting out or trying to rent out a property when it isn't in use doesn't seem like a hobby.

Thanks for your help. I am trying to understand this better as I trying to decide how to use this property and what the tax impacts are.
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