[Blue Caper]

Hey everyone,

Just want to say that I'm a big fan of the new forum. I've been following many of the blogs for a while now, and while I'm not ready to commit to my own blog, this forum is an great opportunity to become active in the DIY financial community.

Anyways, I purchased my first home a little over 2 years ago. My brother moved in with me this winter so that he could attend post secondary schooling in the city. He gives me $550 every month.

Do I have to declare this 'rent' money as income on when I file taxes next year? If so, how would I declare it?

Thanks ahead of time for the comments.

-Pete

 

[FrugalTrader]

Hey Pete, welcome to the forum!

Yes, any income that you receive "should" be declared on your taxes. However, since you'll be declaring rent income, you can claim home expenses as well. That is, if the rental room is 25% of the livable space of your house, then you can claim 25% of the mortgage interest, property tax, insurance, maintenance.

I've written about this topic before: rental property income taxes and deductions

 

[Ben]

Question many may ask is, is he likely to be further ahead by declaring or not? Probably not, but he will feel good about his ethics, and providing the governments with tax revenues in their time of need.

Simple example: assuming $200k mortgage at 5% interest rate (say $10k interest for the year), property tax $3000, $600 insurance, $2000 utilities for the year, for a total of $15.6k. Assuming the room is 25% of the livable space (not sure on definition of livable space, but I'm sure a quick search would yield the answer), the deduction would be $3900. 12 months rent at $550 is $6600. Additional taxable income is then $2700. At 32% tax rate, additional $864 to the taxman.

I forgot maintenance and improvements above, so change the numbers to suit. If you are making fairly substantial improvements like a deck or a new roof in one year, then that additional capital expenditure could balance out the equation.

 

[MoneyGal]

But keep in mind these caveats, from the CRA circular on rental income:

Renting below fair market value

You can deduct your expenses only if you incur them to earn income. In certain cases, you may ask your son or daughter, or another relative 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, in fact, a cost-sharing arrangement, so you cannot claim a rental loss.

If you lose money because you are renting a property to a relative for a lower rate than you would rent it to other tenants, 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. However, 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 reasonably expect to make a profit.

 

[MoneyGal]

and also: in response to Ben's comment about deducting capital expenses: be very, very clear that you may be putting at risk the principal residence capital gains exemption if you do this. My standard recommendation is to claim current (not capital) expenses only.

 

[Blue Caper]

But keep in mind these caveats, from the CRA circular on rental income:

Renting below fair market value

You can deduct your expenses only if you incur them to earn income. In certain cases, you may ask your son or daughter, or another relative 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, in fact, a cost-sharing arrangement, so you cannot claim a rental loss.

So if I'm renting to a relative for below the going market rate, I don't have to claim this income? Am I reading this correctly?

 

[stardancer]

I am assuming that part of the $550 covers groceries. If so, then the full $550 is not considered rental income. Be very careful when renting to relatives for all the reasons listed above.

If you don't declare the rental income, the caveat is that he cannot claim the Ontario Tax Credit (if you live in Ontario; don't know about rental rebates in the other provinces). That's a decision both of you will have to agree on.

If you are renting at well below the market value, you can claim expenses only to bring the net income to zero. Rental losses will get CRA's attention and they may determine that you received more rental income than you are actually charging, or just disallow the expenses.

Do NOT report capital expenditures to your house or take Capital Cost Allowance on it. You will be in big trouble later on when you come to sell, as the principal residency will be partly compromised.

 

[MoneyGal]

Stardancer, I am more conservative than you are. IME (in my experience) CRA may disallow a rental arrangement that never produces any profit. The part of the circular I quoted from earlier notes this - you must have a reasonable expectation of profit in order for CRA to allow the deductions against income.

CRA's point of view is that you *cannot* rent below market value (never mind "well below market value") and take deductions against the income to reduce it to zero.

Either you are cost-sharing, or you are in the business of renting to produce income.

In the first case, you do not report the income, and you do not take deductions. In the second case, you report the income, you MUST have a reasonable expectation of profit (which means in practice you must eventually show a profit), and you take deductions against income.

Blue Caper: I would take your specific circumstances to an accountant or tax preparer for a look.

 

[Elbyron]

So if I'm renting to a relative for below the going market rate, I don't have to claim this income? Am I reading this correctly?

Yes, that is correct. It seems to me that $550 is too low to be considered a fair market rate in Calgary, especially if that's including food. So your situation would probably be considered a cost-sharing arrangement, unless you can determine that properties similar to yours are renting this low.

If you agree that this is a cost-sharing arrangement, then do not claim this $550 as rental income, and nor should your brother delcare that he paid you rent. I've never heard of any tax credit for renters in Alberta, so there would be no benefit to him for claiming that he's paying you rent.

 

[Blue Caper]

These are great points guys. I appreciate everyone's input. I will eventually seek professional help but I'm looking to educate myself (and hopefully others!) first.

To add some numbers to the scenario, I am definitely charging my brother below the normal rate for my neighbourhood. The $550 includes utilities, tv, internet, shared food.

TV: $60
Internet/phone: $70
Utilities: ~$250
Food: ~$420

Total: $800/mo (his share of the cost sharing is 50% so $400/mo)

N.B.: Land taxes $2400 / mortgage interest ~ $12000/ Insurance $600
Living space for brother = 40% (he gets the basement + some shared spaces like the kitchen and living room)

Now a few more questions:

(1) If I decided that my situation is indeed a cost-sharing arrangement and I didn't declare the $550 as income, what evidence would I have to provide if I was audited? Should I be keeping a file of bills and grocery expenses etc?

(2) If I went down the path of declaring this as rental income, should I be writing my brother receipts every month for his rent and keep a copy for my files?

Using my numbers above, the expenses would be greater than income. (expenses = $190/mo + (2400+12000+600)*40%/12mo = $690/mo)
*I removed the grocery portion as I don't see that being an expense. Probably would have to reduce the rent and ask for some cash to cover food. Would I be opening a can of worms now that my expenses are greater than income? Do I just tweak the living space percentage until the expenses are equal to the income?

On the other hand... maybe it's time for a rent increase

 

[ghostryder]

(1) If I decided that my situation is indeed a cost-sharing arrangement and I didn't declare the $550 as income, what evidence would I have to provide if I was audited? Should I be keeping a file of bills and grocery expenses etc?

You could keep records just in case but if you got audited there are only 2 options: 1. A cost sharing arrangement with non-deductable expenses or 2. Rental revenue with deductable expenses. If you get audited why would CRA force you to be #2 if it puts you in a rental loss position? There would be no point, there would be no taxes to recover. They wouldn't waste their time, there are bigger fish to fry.

 

[chayglass]

Question in general... does this still apply, i.e. is the cost-sharing still an option, if it's a friend (or two) instead of a brother?

I don't really intend to charge them anywhere near market value, not least because they'd end up almost splitting the cost of my house and that doesn't seem remotely fair (although fun for me )... so my inclination is to take the cost sharing route if I can and go from there.. but I don't want to cause myself trouble.

Thoughts?