How is the rent of a family member or partner taxed? – Money sense

Rental income

When you earn rental income, you report it on your personal tax return on form T776 Statement of Real Estate Rentals. You can claim rental costs to reduce your taxable rental income. Common expenses include:

• Advertisement
• Insurance
• Mortgage interest
• Legal and accounting costs
• Management costs
• Condo Fees
• Repairs and maintenance
• Property taxes
• Utilities

This list is not exhaustive, and repairs and maintenance can be complicated as some expenses that are more permanent in nature (such as a renovation) may be capital expenses that must be depreciated over time.

Rental losses

If you have more expenses than income, you could suffer a loss of rent. You can deduct a net rental loss from your other sources of income. This can result in tax savings.

If you have persistent rental losses, especially if the losses are the result of charging low rent, the Canada Revenue Agency (CRA) may start asking questions.

Rent below fair market value

If you charge below market rent because you have been a tenant for many years and provincial guidelines limit rent increases, this may be an exception. But if the rent is low because you have a non-business person, such as a family member, who gives you a good deal, this could wipe out your ability to claim rental losses.

“In certain cases, you can ask your son or daughter, or someone else who lives with you, to pay a small amount for the maintenance of your home or to cover the cost of groceries,” the CRA said. “You do not declare this amount in your income and you cannot claim rental costs. This is a cost-sharing arrangement, so you cannot claim rental loss.”

This seems to be the case with your clients, Hans, so I would say the “rent” is not taxable rental income, at least in the eyes of the CRA.

Common law status

You mention a three-year time horizon for common law status in Ontario. This is a family law concept and may apply when two people live in a marital relationship concept. After three years of living together, there may be support payments that one party must pay to the other if their relationship breaks down. Exceptions may apply, especially if they have a child together.

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The implications for family law can be complex and vary by province and territory. In some parts of Canada, common law couples have the same rights as married couples, and property rights may even apply to common law couples.

Regardless, it is important to note that for tax purposes there is only a twelve month threshold before common law status applies. Once a couple has lived together for one year, they must report this change of status in their tax return. It’s not optional.

When a married couple has common-law status, they may be able to save taxes by combining medical expenses or donations on one spouse’s tax return to claim higher, nonrefundable tax credits. But they may also lose access to certain means-tested government benefits, such as the GST/HST credit.

Summary

Rental costs are only deductible if you incur them to earn income. When someone pays you “rent,” it may not be rent from a tax perspective if it is simply a cost-sharing arrangement.

Although you can rent a property to a family member, it should be treated as you would if the tenant were a distant stranger. So make sure you understand the rules so you file your tax return correctly.

About Jason Heath, CFP

Jason Heath is a fee-only, consulting-only Certified Financial Planner (CFP) with Objective Financial Partners Inc. in Toronto. He does not sell any financial products.