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My question is, how would CRA treat this situation?
They would treat it as tax evasion, and it would be a slam-dunk case. There is no ambiguity there. Failing to disclose income is evasion.

He and his "spouse" can have only one principal residence between them. But in any event, that argument is a red herring ... the concept of principal residence only comes into play when a property is sold ... if he's not selling either property, then it makes no difference whatsoever which one he wants to think of as his principal residence.

Is he perhaps thinking that choosing not to deduct legitimate interest expenses will lessen his chances of "getting caught"? ... if so, then clearly he understands that there is something offside here ... if it was legit, there would be nothing to get caught doing.
 

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But it does. When he buys a second property and moves into it, the first is deemed to have been disposed even if he doesn't sell it. The cost base of the rental property is the appraised value on the day it ceases to be a principal residence.
Yes, you're right, if it is a permanent change in use, and if he does not "elect" to continue treating it as his PR for 4 additional years, as he is entitled to do.

What I meant was that it makes no difference to whether the rental income would be taxable or not ... even if he did continue to consider it his PR, it wouldn't change the fact that the rental income is taxable.
 

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He can structure his mortgage is such a way that there is very little taxable income from the rental property. Not sure what he is trying to achieve here.
I agree that it serves no legitimate purpose to avoid claiming an eligible interest expense ... but if the mortgage interest isn't enough (in combination with all the other expenses) to fully offset the income, then there would still be tax exposure ... he could reduce the rent, but ......

I expect that what he's trying to achieve is evasion ... by not claiming the interest deduction, it may not be as "obvious" to CRA.
 
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