The Canada Revenue Agency headquarters’ Connaught Building in Ottawa. (Credit: Sean Kilpatrick/The Canadian Press files)

 

Renting out property is a popular way for Canadians to generate additional income or support family members. If you own a property and decide to rent it to a family member—such as your mother—it might seem straightforward to claim all associated expenses and losses on your tax return. However, the Canada Revenue Agency (CRA) has specific rules that limit or prohibit claiming significant rental losses when the tenant is a related person.

Understanding these rules is crucial to avoid unexpected tax consequences, reassessments, and penalties. This blog will explain what the CRA expects, why certain losses might be disallowed, and how you can structure your rental agreement to stay compliant.

The Basics: Renting Out Property and Tax Implications

When you rent out a property, you are required to report rental income and expenses on your tax return using the T776 form (Statement of Real Estate Rentals). Rental income includes all amounts received from tenants, and deductible expenses can include mortgage interest, property taxes, utilities, insurance, maintenance, and depreciation (capital cost allowance).

If your total expenses exceed rental income, you typically report a rental loss. This loss can reduce your overall taxable income and lower your tax bill.

The CRA’s Concern with Family Rentals

The CRA recognizes that family rental arrangements can sometimes be informal or not based on fair market value rent. When you rent property to a close family member like your mother, the CRA carefully reviews the arrangement to ensure it reflects a legitimate business activity rather than a personal use or tax avoidance scheme.

The primary concern is whether the rental activity is carried out with a “reasonable expectation of profit.”

What Is “Reasonable Expectation of Profit”?

The CRA expects that rental activities be conducted in a businesslike manner with the intent to make a profit or at least break even. If you rent your property below market value, especially to family, the CRA may determine that you lack a genuine profit motive.

Without this profit motive, the CRA can deny or limit your ability to claim rental losses, especially if the rental property is effectively being used for personal purposes (for example, providing subsidized housing to your mother).

How the CRA Limits Losses When Renting to Family

When the CRA identifies that the rental activity does not meet the profit expectation or is below fair market rent, they may apply what’s called the “personal use property” or “non-commercial rental” rules. Under these rules:

  • You can only deduct expenses up to the amount of rental income received. This means you cannot claim a loss that reduces your other income.
    • Any expenses beyond the rental income are disallowed for tax purposes.
    • You must carefully track expenses related to rental and personal use separately.

    This is intended to prevent taxpayers from artificially creating rental losses to offset other taxable income when renting to family at discounted rates or for free.

    Why Does the CRA Take This Stance?

    The CRA’s position prevents abuse of the tax system. Without these rules, taxpayers could rent properties to relatives at below-market rents, claim substantial losses, and unfairly reduce their overall tax burden.

    The goal is to maintain fairness and ensure rental losses are claimed only when the rental is a genuine income-earning activity, conducted commercially and at fair market rent.

    Examples to Illustrate the CRA’s Position

    Example 1: Renting at Fair Market Rent

    Suppose you rent your property to your mother at $1,500 per month, which reflects fair market rent for similar units in your area. You incur $20,000 in expenses during the year, and your rental income totals $18,000. Here, you have a $2,000 rental loss.

    Because the rent is fair market value and the rental activity shows a profit motive, the CRA will generally allow the $2,000 loss to offset other income.

    Example 2: Renting at Below Market Rent

    If instead, you charge your mother $800 per month when the fair market rent is $1,500, your rental income is $9,600, but your expenses remain $20,000, resulting in a $10,400 loss.

    In this case, the CRA will likely limit your deductions to $9,600 (your rental income), disallowing the remaining loss because the rent is below market and there is no reasonable expectation of profit.

    How to Protect Yourself and Comply with CRA Rules

    1. Charge Fair Market Rent

    To avoid disputes with the CRA, charge rent that aligns with current market rates. You can research similar rental listings or consult a real estate agent for market rent valuations.

    2. Have a Written Rental Agreement

    Document your rental arrangement with a formal lease agreement specifying rent, duration, responsibilities, and payment terms. This adds credibility and clarity.

    3. Maintain Proper Records

    Keep copies of rent payments, receipts, and expense invoices. Record communications regarding rent discussions with your mother.

    4. Separate Personal and Rental Use

    If your property is used partially for personal purposes, accurately allocate expenses between rental and personal use.

    5. Consult a Tax Professional

    Tax rules around family rentals can be complex. A qualified tax advisor can help structure the rental to comply with CRA guidelines and optimize your tax position.

    What Happens If You’ve Already Claimed Losses?

    If you have previously claimed rental losses when renting to your mother below market rent, be aware that the CRA can reassess past returns, requiring you to pay back taxes along with interest and possible penalties. It is advisable to review your previous tax filings with a tax professional and correct any issues proactively.

    Broader Impacts and Final Thoughts

    Understanding and following the CRA’s rental loss rules is essential for anyone renting property to family members. As communities rebuild and adjust after recent disruptions, such as when Canadian airports resume regular operations following past interruptions, the need for financial clarity and tax compliance grows even more important.

    Renting property to family members can be a generous gesture, similar to the spirit demonstrated by Terry Fox, whose dedication and courage remain an enduringwell-beingf Responsibly supporting your family arrangements complies with tax rules, helps protect your financial well-being, and responsibly supports your family.