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 expenses to reduce your taxable rental income. Common expenses include:
Advertising
Insurance
Mortgage interest
Legal and accounting fees
Management fees
Condo fees
Repairs and maintenance
Property taxes
Utilities
This list is not exhaustive, and repairs and maintenance can be complicated because some expenses that are more lasting in nature—like a renovation—may be capital expenses that must be depreciated over time.
Rental losses
If you have more expenses than income, you can have a rental loss. A net rental loss can be deducted from your other sources of income. This can result in tax savings.
If you have consistent rental losses, especially if the losses result from charging a low rent, the Canada Revenue Agency (CRA) may start asking questions.
Renting below fair market value
If you are charging below market rent because you have a long-time tenant and provincial guidelines limit rent increases, that may be an exception. But if the rent is low because you have a non-arm’s length individual like a family member you are giving a good deal, this may negate your ability to claim rental losses.
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“In certain cases, you may ask your son or daughter, or anyone else living with you, to pay a small amount for the upkeep of your house or to cover the cost of groceries,” according to the CRA. “You do not report this amount in your income, and you cannot claim rental expenses. This is a cost-sharing arrangement, so you cannot claim a 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 are living in a conjugal relationship concept. After three years of cohabitation, there may be support payments payable by one party to the other should their relationship break down. Exceptions may apply, most notably if they have a child together.
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Family law implications can be complex and vary across provinces and territories. In some parts of Canada, common-law couples have the same rights as married couples, and property rights may apply even for common-law couples.
Regardless, it is important to note that for tax purposes, there is only a 12-month threshold before common-law status applies. Once a couple has lived together for one year, they must report this change in status on their tax return. It is not optional.
When a couple is common-law, they may be able to save tax by combining medical expenses or donations on one spouse’s tax return to claim higher non-refundable tax credits. But they may also lose access to certain means-tested government benefits, like the GST/HST credit.
Summary
Rental expenses can only be deducted when you incur them to earn an 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 must be treated like you would if the tenant was an arm’s length stranger. So, make sure you understand the rules so that you file your tax return correctly.
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