Charge less rental and still claim a loss – please read on

Reporting income generated from the rental property seems straight forward. If your rental expenses are more than your gross rental income, then you will have a rental loss. Simple! The beautiful thing is, if you incur the expenses to earn income, you can deduct your rental loss against your other sources of income.

In some situation, you may ask your relatives or anyone else living with you to pay a small amount for the upkeep of your house or to cover the cost of groceries. You do not report this amount in your income, and you cannot claim rental expenses, either. This is so called a cost-sharing arrangement, so you cannot claim a rental loss.

In situations like you lose money because you rent a property to a person you know for less money than the real market rental rate, you cannot claim a rental loss, either. When you rental expenses are consistently more than your rental income, you may not be allowed to claim a rental loss because your rental operation is not considered to be a source of income.

A source of income?! What is that?
A source of income is the base that tax authority(CRA) to determine whether profit from activities is taxable. Whether an individual has a reasonable expectation of profit is an objective determination to be made from all of the facts and based on the activities actually undertaken by the individual. It should be noted that it is the “expectation” of profit that is being assessed, not the actual realization of those profits, and that “reasonable” refers to the expectation of profits, and not whether the profits are reasonable.

Some points should be considered when determining whether an activity engaged in by an individual has a reasonable expectation of profit:

The profit and loss experience in past years;

The amount of gross income, if any, reported over several years;(a few years!)

The length of time over which a profit could reasonably be expected to be shown must be relevant to the nature of the activity; 

The extent of activity in relation to that of businesses of a comparable business;

If you have reported a rental loss for a number of years, it’s suggested revisiting the practice before the CRA sends you a letter to ask more details of the property.