[CanadianCapitalist]

This appears dangerous (and illegal) to me, but wanted to see what others thought.

I concur. To me, this is definitely cheating on taxes. It is questionable even if the friend even has to cheat. If the friend owns the condo free and clear but is taking out a mortgage on the new house, he can surely structure matters in a very tax efficient manner.

 

[CanadianCapitalist]

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.

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.

 

[CanadianCapitalist]

Right, but in his case, he has mortgages on both properties.

Since he has a mortgage on the principal residence as well as the condo, I fail to see what advantage there is in not reporting rental income. The rental income is offset by expenses such as mortgage interest, maintenance etc. (I'm not an expert on rental properties, so other members feel free to correct any inaccuracies). 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.

 

[CanadianCapitalist]

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.

Agreed. Whether or not a home is a principal residence makes no difference to whether rental income is taxable or not. If it is income, it should be declared and it is taxable. Period.