Statement Of Rental Income, Form T776
There are two versions of income statements you can use to summarize the performance of your rental properties, and both give you a different result, sort of. But how can that be? The difference between the two is the metric they’re both supposed to measure.
One version is the income statement an investor would use to calculate the cash flow of an investment property, and the other one is used to calculate your taxable rental income and report it to the Canada Revenue Agency.
There is definitely a benefit to analyzing your performance from more than one point of view, so using both of these reports throughout the year will help you with measuring your performance and with forward planning.
The income statement I use to evaluate potential investments and measure the performance of my own portfolio is the one that calculates net cash flow, and is set up as follows:
Gross Rent – Vacancies – Operating Expenses = Net Operating Income – Debt Service = Net Income or Cash Flow
The form that you have to include with your annual tax filing is Form T776 Statement of Rental Income, you can download it from the Canada Revenue Agency website here. This statement is slightly different in that it has a line under expenses for interest. This is because you can only deduct the interest portion from your taxable income, but principal and interest payments both come out of your cash flow. It also has a line for capital cost allowance (CCA), which is a non-cash expense that accounts for depreciation of the property. Form T776 looks a lot like this:
Gross Rent – Operating Expenses – Interest – Capital Cost Allowance = Net Taxable Rental Income
I look at both reports throughout the year. The first one lets me gauge how well the year is going from a cash flow point of view, and gives me an idea of my performance as a property manager and lets me know which properties are performing better than the others. The other statement gives me an idea of what my tax burden might be at the end of the year. Since my income from my rental properties has to be added to my employment income, it’s helpful to have this information before the end of the year so that I can time my planned capital expenditures. It also gives me a heads up as to whether I need to set some funds aside to cover the income tax bill at the end of the year.
As you start preparing these reports, you’ll begin to notice that the end result is often different. That’s ok, because as I pointed out earlier, debt payments and depreciation are handled differently on both reports. The higher the purchase price of the property, the bigger the impact that Capital Cost Allowance will have on taxable income.