Sometimes tax law isn’t black and white, especially when it comes to reporting rental
income in a family arrangement.
In the case of this, a Taxpayer claimed rental losses while his family lived in his property. He even reported the income. So what went wrong?
As it turns out, quite a bit.
What Happened: The 2015 to 2017 Tax Years
Between 2015 to 2017, Taxpayer reported that he was renting out a small house
he owned in Ontario.
He recorded rental income of:
1. $7,200 in 2015
2. $7,200 in 2016
3. $7,000 in 2017
But he also reported rental expenses of over $20,000 per year:
1. $21,510 in 2015
2. $24,818 in 2016
3. $17,691 in 2017
This resulted in rental losses of:
1. $14,312 (2015)
2. $17,619 (2016)
3. $10,693 (2017)
That kind of consistent, large loss is a red flag to CRA.
The Property Was in Rough Shape
This was not your typical rental. The house had been severely damaged by flooding in 2014. The basement had groundwater seepage, which required extensive foundation
repairs. Taxpayer had to:
- Excavate the foundation
- Install new weeping tile
- Rebuild exterior walls
- Put up temporary wooden walkways over open trenches to access the house.
Despite the state of the property, taxpayer’s mom stayed. Most people would have considered it uninhabitable.
He Renovated Bit by Bit on Weekends
Taxpayer is an electrician by trade. He worked on the property himself during
weekends, often sleeping on a mattress in the spare bedroom, which he also used as a
tool storage room.
He completed electrical upgrades, replaced windows, patched walls, and supervised
contractors. Most of this work happened over weekends since he worked elsewhere
during the week.
Even though he did not live there full-time, he clearly had personal use of the property.
After taxpayer’s mom passed away in 2021, the house sat empty. No new tenants. No advertising.
In 2024, he moved in himself. It became his principal residence.
But He Reported the Income. Isn’t That Enough?
Yes, Canadians are required to report all income, even from informal arrangements with
family. At first glance, it looks like a Taxpayer did the right thing.
But reporting rental income while also claiming large ongoing rental losses will almost
always attract attention. CRA took a closer look and determined that this was not a
commercial rental activity.
The Red Flags That Sank His Case
Here is what the Tax Court found:
- No profit motive
The Taxpayer’s mom paid only $600 per month. That was well below market rent. She did not pay
for utilities, taxes, or maintenance. Taxpayer covered all of those costs. - No lease terms protecting his use
He stayed there regularly on weekends and used the house for storage and
renovations. The lease did not mention this shared use. - Cash rent and questionable documentation
Rent payments were made in cash. Some receipts showed large lump sums and
were not signed by Taxpayer. One odd example was a $200 rebate paid at the
end of the lease term, even though the disruptions occurred years earlier.
- No third-party rental activity
After taxpayer’s mom passed away, the property was never listed for rent. It sat empty until
Taxpayer moved in himself. - No attempt to operate as a commercial rental
There was no advertising, no market rent, and no plan to find other tenants. The
Court noted that during the COVID years, when rural rentals were in demand, the
house still sat vacant.
The Legal Test from Stewart v. Canada
When it comes to grey areas in tax law, courts often rely on past decisions to help
guide the outcome. That is not just a legal formality — it is a practical tool. Just like we,
as tax advisors, look at previous CRA rulings or Tax Court cases to find clarity, the
courts do the same.
In this case, the judge turned to a well-known Supreme Court of Canada decision:
Stewart v. R. This case laid out a two-step test to determine whether an
activity is truly a source of income.
Here are the two questions from the Stewart test:
- Was the activity undertaken in pursuit of profit, or was it personal?
- If it was commercial in nature, is the source of income from business or property?
The Court found that Taxpayer activity failed at the first step. It was not carried out
with a genuine intention to earn a profit.
Instead, the Court concluded that it was a personal arrangement. On
top of that, it was a long-term renovation project that eventually resulted in Taxpayer moving into the property and making it his home
Cherry’s Take: This Is Where It Gets Grey
This is one of those situations where the taxpayer may have genuinely believed he was
doing the right thing.
He reported the income.
He issued receipts.
He treated the payments as rent.
But CRA looks at intent and behaviour, not just numbers. This wasn’t a commercial
rental. There was no marketing, no attempt to earn a profit, and no real landlord-tenant
relationship.
The fact that he stayed there on weekends and eventually moved in suggests it was
always more of a personal project than a business.
If You Are in a Similar Situation
If you are renting to a family member and want to claim rental expenses, make sure
you:
- Charge fair market rent
- Sign a proper lease agreement
- Do not use the property personally
- Maintain clear and signed documentation
- Show a real intention to earn a profit
If it is just cost-sharing, that is fine. But in that case, do not try to deduct expenses against that income. CRA may reclassify the activity as personal use, which means none of the expenses will be allowed.
Final Thoughts
This Taxpayer case is a reminder that simply reporting income is not enough. If you are
reporting rental losses and claiming expenses, you must demonstrate that you are
actually operating a rental business.
Family arrangements often fall into a grey area. But if there is no profit motive and no
effort to act like a landlord, CRA will likely treat the arrangement as personal.
In this Taxpayer case, the Court saw it for what it was: a personal living situation, not a
rental business.
Until next time, Happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
