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Canada: Below market value rental tax implications
02-17-2016, 07:41 AM
Post: #1
Canada: Below market value rental tax implications
For 15 years we have rented a house at well below market value to a family member while, on the advice of a tax preparer, claiming deductions for everything from the usual property taxes, insurance and mortgage interest, to new roof, furnace, washer/dryer, curtains, furniture, paint, all utilities, and right down to claiming rental property telephone and cable tv bills as expense deductions.

I have long questioned the tax preparers assertion that this is all fine. Last week we received a letter from Revenue Canada that states that we can not deduct expenses on a property that is rented at below market value to a "non-arms length person" (presumably family) at a rate lower than we would rent the property to a stranger. In fact, the house has rented - for 15 years - at about half of market value. The house has operated at a loss for almost all of the 15 years.

When contacting the tax preparer about this, his opinion was to ignore the letter from CRA; that it is a "bluff" and a "form letter" they send out hoping to scare people into stopping claiming so many deductions. I'm not so certain. He does not seem to have an answer as to exactly how and why he thinks the market value rules don't apply to us, and/or whether we are now at risk of being audited ... and, critically, if audited might we be subject to large penalties, back taxes and interest for deductions permitted in the past but now deemed disallowed under the market value rent rule.

Any comments or information on the rules would be appreciated.
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08-30-2016, 03:57 AM
Post: #2
RE: Canada: Below market value rental tax implications
Canada Revenue Agency (CRA) has a Rental Income Tax Guide (T4036) which goes into detail about deductible expenses, capital cost allowance, deemed dispositions, splitting of expenses between personal areas and rental areas, and most issues regarding property rental.

Losses created as a result of a rental at below market value cannot be claimed as tax deduction. This is CRAs position.



(02-17-2016 07:41 AM)jimbobbrown Wrote:  For 15 years we have rented a house at well below market value to a family member while, on the advice of a tax preparer, claiming deductions for everything from the usual property taxes, insurance and mortgage interest, to new roof, furnace, washer/dryer, curtains, furniture, paint, all utilities, and right down to claiming rental property telephone and cable tv bills as expense deductions.

I have long questioned the tax preparers assertion that this is all fine. Last week we received a letter from Revenue Canada that states that we can not deduct expenses on a property that is rented at below market value to a "non-arms length person" (presumably family) at a rate lower than we would rent the property to a stranger. In fact, the house has rented - for 15 years - at about half of market value. The house has operated at a loss for almost all of the 15 years.

When contacting the tax preparer about this, his opinion was to ignore the letter from CRA; that it is a "bluff" and a "form letter" they send out hoping to scare people into stopping claiming so many deductions. I'm not so certain. He does not seem to have an answer as to exactly how and why he thinks the market value rules don't apply to us, and/or whether we are now at risk of being audited ... and, critically, if audited might we be subject to large penalties, back taxes and interest for deductions permitted in the past but now deemed disallowed under the market value rent rule.

Any comments or information on the rules would be appreciated.
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