RENTAL PROPERTY – SOURCE OF INCOME?

Issue 448, December 2018

In an October 24, 2018 Tax Court of Canada case (Hustak vs. H.M.Q., 2017-1119(IT)I), at issue was whether the taxpayer carried on his rental of two properties in a sufficiently commercial manner to constitute a source of income. The taxpayer reported revenues ranging from $8,100 to $8,250 and expenses ranging from $13,099 to $16,782 for the 2005 to 2011 years.

Taxpayer loses
While the taxpayer argued that he charged below market rent due to high vacancy rates, to attract tenants, to retain insurance coverage as the insurance company noted that they would not cover the properties if they were vacant, and because the tenants had expressed an interest in purchasing the property, the Court did not accept that he carried on the operation in a sufficiently commercial manner for profit.

cost recovery versus profit motive

Specifically, the taxpayer did not obtain leases with tenants, made no attempt to determine comparable market rent, and did not increase rents over the years despite significant expenses incurred. Also, the taxpayer’s intention was not to make a profit but to simply recover the costs of certain expenses. He did not realize a profit in any of the years in question. Further, he had rented out one of his properties for a portion of the years in question to his niece for less than he had charged to arm’s length tenants.

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