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Renting out basement apartment below fair market value
April 20, 2021
8:17 pm
fatmansuen
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From TurboTax tips:
https://turbotax.intuit.ca/tips/claiming-a-loss-on-rental-property-6385

The average 1 bedroom apartment in Toronto is $1800/month (2020).

If the owner is renting her basement apartment to a friend for $1200/month, is she required to claim the rent as income? The owner has never claimed rental expenses previously on her house.

Thanks.

April 20, 2021
9:12 pm
Norman1
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Yes, the owner does need report the income if she is making a profit.

Just because a highly leverage speculator needs to rent at $1,800/month to stay afloat doesn't mean someone who has a small mortgage can't rent at $1,200/month and have a profit.

Is she willing to stand in front of a Tax Court judge and swear that she is losing money or just splitting actual expenses when she is renting to her friend at $1,200/month?

If she is not willing to claim any rental expenses, then she owes income taxes for $1,200 of pure profit each month!

April 21, 2021
5:20 am
Alexandre
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It is worth to read what TurboTax link provided by OP says:

You cannot claim a rental loss if you are renting your property to family or friends below fair market value.

For example; if similar basement apartments are renting for $800 per month in your neighbourhood, and you rent your apartment to your sister for $300 per month, you can’t claim a rental loss, although you won’t be required to report the rental income either.

The part that says "you won’t be required to report the rental income" must be wrong.
I wonder how many people will be burned by this TurboTax "tip."

April 21, 2021
5:47 am
Kidd
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Interesting read, which states the same as turbo tax.

https://www.liuandassociates.com/blog/when-do-i-need-to-report-rental-income/

April 21, 2021
6:16 am
Alexandre
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This is directly from Canada.ca, which refers to CRA:

Renting below fair market value
You can deduct your expenses only if you incur them to earn an income. 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. 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.

If you lose money because you rent a property to a person you know for less money than you would to a person you do not know, you cannot claim a rental loss. When your 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. You can claim a rental loss if you are renting the property to a relative for the same rate as you would charge other tenants and you expect to make a profit.

The devil is in the details.

You do not report payments from someone living at your house as rental income when these payments are for "cost-sharing arrangement."
For example, my sister lived in my house for a number of years, she paid her portion of utilities bill, cable, Internet, of groceries, and occasionally shared costs of minor house repairs.
What she paid me monthly, variable amount, is not considered rental income, and I am not required to report it as such.

My close friend might need a place to stay for a few months, and I am willing to let him stay at fixed "all inclusive" monthly fee below the rate charged for similar accommodations in my neighborhood.
If I can't package my offer to my friend as "cost sharing arrangement," it could become rental income. I can't claim rental loss on that income, but if I still make money from this after deducting reasonable rental related expenses, that money I make could (and should) be reported as rental income.

---------------

This is of course my personal take, and I am not CPA.

April 21, 2021
7:31 am
Norman1
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Alexandre said
… I can't claim rental loss on that income, but if I still make money from this after deducting reasonable rental related expenses, that money I make could (and should) be reported as rental income.

Yes, if one has a profit, one has to report it, regardless of how much below market one is charging.

The missing context for that statement is as follows:

You cannot claim a rental loss [and apply it against your other income] if you are [purposely] renting your property to family or friends [or other non-arms length parties] below fair market value.

It doesn't mean that one is not required to report the rental income when one has a profit renting to family or friends at below fair market value.

April 21, 2021
8:39 am
Bill
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CRA generally considers that transactions between family are not at arm's length whereas transactions with others (e.g. friends) may or may not be considered to be at arm's length, depending on the circumstances. If transactions are at arm's length then they're generally considered to occur at fair market value. Is my amateur understanding.

April 21, 2021
1:42 pm
LK
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fatmansuen said
From TurboTax tips:
https://turbotax.intuit.ca/tips/claiming-a-loss-on-rental-property-6385

The average 1 bedroom apartment in Toronto is $1800/month (2020).

If the owner is renting her basement apartment to a friend for $1200/month, is she required to claim the rent as income? The owner has never claimed rental expenses previously on her house.

Thanks.  

Is this a repeat / variation of the question you asked in the following thread? https://www.highinterestsavings.ca/forum/income-tax-filing/rental-property-income-question/

If so, might it be that your question was answered there? Specifically, see the reply 13 from Bill, which states "Regarding that CRA Guide T4036 says 'The person who owns the rental property has to report the income or loss.'"

April 21, 2021
3:36 pm
Kidd
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BUT... to all of you.

The correct answer is. NO YOU DO NOT NEED TO REPORT RENT INCOME, if you rent out AT below fair market value.

Read the link in post 4.

WHEN DO I NEED TO REPORT RENTAL INCOME?
Feb 29, 2020  Posted By Liu & Associates

Renting property seems like a lucrative entrepreneurial opportunity as more and more individuals are renting out portions of their home and even offering space through popular accommodation services such as Airbnb.

Acquiring rental income is a great way to offset the cost of a mortgage or justify an investment in a secondary property.

However, if you are renting your property to a third party, you are required to report your rental income on your tax return.

While it may be tempting to not disclose this income to the CRA (Canada Revenue Agency), not doing so can lead not only to penalties but also missed opportunities for some tax savings.

WHAT IS RENTAL INCOME?

When it comes to claiming rental income on your taxes, rental income is considered to be any earned income from a rental property you own. This includes houses, apartments, rooms, office space and other real or movable property.

Rental income from Airbnb, income suits and any short term rentals must be claimed as well.

The duration of the rental, whether it be for one night, a week or a month, does not exempt the income from having to be claimed on your income taxes.

EXCEPTIONS TO CLAIMING RENTAL INCOME

There is one exception to having to claim rental income on your income taxes – if you are renting a space below fair market value.

Renting below fair market value means that you are charging a rent significantly lower than rents charged for other properties that are similar to your property in your area.

Typically, home owners will charge family members below fair market value rent for allowing them to stay in their home.

If this is the case, you do not need to claim the income. However, you cannot claim any rental expenses or rental loss on your taxes.

The government considers this situation to be a “cost-sharing arrangement”.

April 21, 2021
4:40 pm
Norman1
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Kidd said
BUT... to all of you.

The correct answer is. NO YOU DO NOT NEED TO REPORT RENT INCOME, if you rent out AT below fair market value.

Read the link in post 4.

WHEN DO I NEED TO REPORT RENTAL INCOME?
Feb 29, 2020  Posted By Liu & Associates

No, it's not the correct answer.

Unfortunately, that is a poor rewording of what CRA says in their T4036 Rental Income Guide that Alexandre quoted. This is what CRA says in its context of rental losses:

Rental losses
You have a rental loss if your rental expenses are more than your gross rental income. If you incur the expenses to earn income, you can deduct your rental loss against your other sources of income.

Renting below fair market value
You can deduct your expenses only if you incur them to earn an income. 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. 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.

If you lose money because you rent a property to a person you know for less money than you would to a person you do not know, you cannot claim a rental loss. When your 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. You can claim a rental loss if you are renting the property to a relative for the same rate as you would charge other tenants and you expect to make a profit.

One cannot make rental income tax free by just charging less than the going rent.

April 21, 2021
4:46 pm
Alexandre
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Kidd said
The correct answer is. NO YOU DO NOT NEED TO REPORT RENT INCOME, if you rent out AT below fair market value.
 

This is not the correct answer, even if it comes from Liu & Associates.

“Cost-sharing arrangement” is different from "I could rent my basement for $1,800, but I only charge $1,200 and that makes it not rental income."

PS. Posted this and then saw Norman1 gave his more comprehensive reply.

April 21, 2021
6:11 pm
Norman1
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Whoever wrote that article may have thought CRA's explanation was too long and decided to edit all that extra verbiage out: sf-laugh

Renting below fair market value
You can deduct your expenses only if you incur them to earn an income. 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 for below fair market value rent. 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.

Unfortunately, some important nuances were lost!

Please write your comments in the forum.