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Homeowners ease mortgage payment burden

AS THE cost of residential
teal estate rises and apart-
ment vacancy rates decrease,
many enterprising home-
owners are renting portions
of their homes to ease the
burden of mortgage Pay-
ments,

1f. you're a landlord, the

Tent. you receive’ during the

year. must--be. included in
: your’ taxable income. Simi-

larly, expenses’ you incur
_ that are directly related to
‘earning rental income are

tax deductible. .
“If revenue from your

-fental suite exceeds your ex-

penses, your taxable income
“Will increase. If, however,
your .. expenses exceed your
- revenue, the net rental loss

‘could ‘be used to. offset in- -
"Come you receive, from’ other

.. Sources, !
;; Revenue Canada’ will only

“alow you. to deduct ex-

.penses’ that you incur to
‘generate’ income. If ‘your

““fental. expenses “are con-
greater. than’ your —
ncome,: Revenue. .’

Canada‘* may -. disallow . the

rental loss, using, the argu-

“Trent that you have no rea-

‘sonable’ expectation’ of*:

- making : a profit...

‘Rental ‘losses’ ‘may! ‘also, be

‘denied: if you -are ' renting

‘(FM V)'to a family. member

or friend. - .
Q: “What” ‘expenses. can i te
deduct in the year in which i

* vent my property? ae

“CAs. There are two types °

‘deductible expenses: current:
- (or ‘recurring) expenses
~? which.’ provide .* short-term
“benefits. and capital: expen-"

’ditures- which Jare : ‘one-time
- expenses. that provide ‘lasting ‘”
“benefits. :- Current Tae
can ‘generally. be.

“the: year incurred ye,
pottion ' ‘of. a capital: ‘expe

- diture i is deducted’ each y
this is your “capital. cost

. lowance (CCA). --

+ Current. expenses. include
items such: as advertising,’ o

property”:tax, insurance, ;
‘accounting ‘and ~; legal. ex-
penses (except’ those

’ associated ~. with. purchasing -

recurring maintenance and
repairs, utilities and mort-
gage interest.

Capital expenditures in-
clude the purchase price of

your home, legal and’ other. -

costs associated with the
purchase, furniture and
fixtures. used in the rental
suite, and capital (non-
recurring) repairs.
Remember, although you
are cligible for deductions
within certain limits, you
can only deduct current and
capital costs related to the
rental portion of your
house.
Q: How can I determine the

difference between 2 current ~

expense and a capital ex-
pense?

CA: Revenue Canada con-
siders an expenditure to be
capital if it extends - the
useful life of your property
or improves it beyond its
original condition.

- For example, if after ren-
-ting ‘your home for a
number of years its cedar

‘shake: roof-is in need“ of -

repair, replacing .it. will
. probably::be considered: a
“current expense..."

“If, -however, you replace
he shakes .with a “longer-
Jasting roofing material, the

expense would “probably be,
‘considered a capital expense
"below. ‘fair. market value .

because |. it improves the
property ‘beyond its original

* condition.

. Qi What is caplial cost al-
* Jowance (CCA)?
(CA? CCA. is ‘the tax term
‘for: depreciation: which
allows ‘you to write off cap-
ital. costs::to account. for
“wear . ‘and: tear or. obsoles-
cence. The rate at: which you
“can ‘claim. CCA. depends on
the “type: of property, you
: purchase. ¢ --
vc Revenue Canada: groups
properties « into’ “classes,
assigning. ‘each a. different
; .For.- example,
‘that: portion: ofthe cost. of
your, home. which ‘you, rent
‘out (excluding land) may be
written off at a rate.of four
~ per. cent (declining balance)
per year (under. certain cir-
cumstances, the CCA -rate
may be five per cent). Fur-
niture and fixtures, on the

other hand, may be written
off. at a rate of 20%
{declining balance) per year.
The cost of land is not eligi-
ble for CCA and cannot be
written off.

‘Q: Will renting'a part of my

house affect my principal
reidence exemption?

‘CA: Revenue Canada will
not tax the gain on the sale.

of your home if it is’ your
principal residence foreach
year of ownership. Renting

will: affect your principal °

residence exemption if CCA
is claimed or if you made

_ substantial structural

changes of a permanent
nature such as converting
your basement suite to a
self-contained ‘domestic
establishment,. giving it the
characteristics of a dup'ex.

If a change in use oscurs
(from personal to rental),

the rented portion of the:

house will be considered to
have been disposed of at the
time of the change at fair
market value (FMV). Any
gain arising at that time may
be offset. by your principal
residence exemption.

The increase in value of.
that portion of the home
beyond that date will not be

included..in _ the principal
tesidence’ exemption. It may

also be taxed in the future,
subject to a review for the
application and-. remainder

‘of your. personal capital

gains exemption.

In determining whether or
nol. .you..wish, to. make
substantial changes “to the
structure of your home or

claim “CCA, you. should

consider the impact on your
principal residence exemp-
tion. ‘

If you need more infor-
mation, consult a chartered
accountant or call the In-
stitute of Chartered Ac-
countants of British Colum-
bia at_ 681-3264, or toll free
in B.C. at 1-806-663-2677
for a referral to CAs in your
area,

- Courtesy of Ritchie Mc- -

Cloy, FCA, executive vice-
president, Institute of
Chartered Accountants of

British Columbia.

SJOGREN |

988-7248
623-7641

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