After you determine whether the income from your rental property or properties is income from business or income from property, the next step is to make sure that you are taking all of your rental income into account.
Ensure you’re declaring all your rental income.
Obviously, the rent that you receive in cash or cheque form is rental income.
But if your tenant is paying all or some of his rent with services or in kind (giving you goods or commodities instead of money) you need to “translate” the value of those services or things you have been given into monetary terms by figuring out their Fair Market Value:
“The amount for which real property or Personal Property would be sold in a voluntary transaction between a buyer and seller, neither of whom is under any obligation to buy or sell” (West’s Encyclopedia of American Law, edition 2. Copyright 2008. The Gale Group, Inc.).
You will record the amounts that your tenant has paid you in cash or cheque in the “Gross rents” column on Form T776 Statement of Real Estate Rentals, which is included in TurboTax.
The fair market value amounts that you have calculated get reported as “Other related income”.
Other “Other Related Income”
Other Related Income is also where you record rental income you receive from premiums and leases, amounts you receive from:
- granting or extending a lease or sublease;
- permitting a sublease; or
- cancelling a lease or sublease.
Don’t forget to include any income you received from sharecropping, either by renting farmland or as a share of the crop.
Next, decide which accounting method you’re using.
You will be reporting your rental income based on the calendar year, from January 1st to December 31st, no matter when you purchased or rented out a particular property.
There are two methods that you can use to account for your rental income: the accrual method or the cash method.
Accrual vs. Cash Methods of Accounting
To account for your rental income using the accrual method you:
- include rents in income for the year in which they are due, whether or not you receive them in that year; and
- deduct your expenses in the year you incur them, no matter when you pay them.
While to account for your rental income using the cash method you:
- include rents in income in the year you receive them; and
- deduct expenses in the year you pay them.
Before you choose which method you are going to use, you need to know that you can only use the cash method if you have no expenses outstanding at the end of the year and “only if your net rental income or loss would be practically the same if you were using the accrual method” (Canada Revenue Agency).
You will also want to know that the accrual method of accounting is the type that most businesses and professionals are required to use by law, so if there is any question of the income from your rental property being classed as business income (see LINK to PART 1), you will definitely want to use the accrual method.
Gross Rental Income
That’s it! Now that you’ve figured out what your total rental income is, you’re ready to enter this number as your total “Gross rents” on form T776, Statement of Real Estate Rentals which will then transfer on line 160 of your T1 income tax return.
You will enter this total rental income figure on line 160 even if you are a co-owner of a rental property; you do not split up the gross income according to your ownership share here.