RENTAL PROPERTY – SOURCE OF INCOME
In an October 8, 2019 Tax Court of Canada case (Crockett vs. H.M.Q., 2018-3615(IT)I), at issue was whether the taxpayer carried on the rental of a property in a sufficiently commercial manner to constitute a source of income. The taxpayer reported losses of $28,938 and $25,903 and revenue of $1,925 and $3,567 in 2013 and 2014, respectively.
The taxpayer’s mother owned the property and lived in it for a number of years. However, due to her marital break-up, she moved out of the home but was unable to sell the property. At this point the taxpayer entered into a verbal contract with his mother. While his mother still owned the property, the taxpayer “took it over”, bearing the costs of repairing the property and making it available for rent and enjoying the rental revenues.
Taxpayer wins
The Court ruled that the taxpayer carried out the operation in a sufficiently commercial manner, allowing the two years of losses. Specifically, it noted the following:
Capability to show a profit – The taxpayer advertised online on a number of forums, as well as set up a PayPal account to collect the rent, of which he collected $1,925 in 2013 and $3,567 in 2014. After all renovations were completed, he expected that he only needed to rent the property out for two weeks every month to cover all costs and enjoy a small profit. With the location of the property being in a year-round vacation destination, the Court accepted his belief that the venture would become profitable.
Profit and loss experience of the venture – While the rental had only been operational for the two years in question, the Court accepted the belief that he would be profitable in the future. Due to substantial financial strain while the taxpayer was underemployed and was dealing with his wife’s illness, the Court accepted that the taxpayer simply did not have the finances to cover the rental property and pay his own family bills and was, therefore, forced to cease activities.
Taxpayer’s training or experience – The taxpayer had been involved in a number of businesses over the years and had an “entrepreneurial spirit.”
Taxpayer’s intended course of action – CRA argued that the taxpayer rented the property to solely help his mother out, while the taxpayer argued that, when his mother left the home, the vacant property provided an investment opportunity that would benefit him and his mother. The taxpayer also invested significantly into the property, with a view to making the property more enticing to potential renters.
Other factors – The taxpayer only stayed in the property when he was working on it and had a business number with CRA.
For further information see Video Tax News Monthly Tax Update Newsletter, Issue No. 460.