Renting a bedroom first time owner

[SheaButters]

I recently bought a house

A good friend of mine wants to rent a room for 400 a month... do his share of cleaning, and groceries.
(I'd pay cable, and everything else as per normal)

He wants to fill out some lease form... (suggested by his dad)


If he claims this on his taxes, what does he gain?

If I claim this, what do I gain? I hear it costs less on water/heating?
I understand if I claim this, I add it to my income, resulting in being taxed at least 30%


Financially what would be best for me?
He is a good friend, would do whatever is best financially for me!



I should add I live in Manitoba


Any other suggestions in general??????

[SheaButters]

bump

[Chris L]

You want to know if you should claim income as income? Do you want to talk to CRA? I think you already know the answer to your question.

[stardancer]

http://www.cra-arc.gc.ca/E/pub/tg/t4...DME.html?=slnk

Read up on this first. If you declare rental income, yes, you can write off a percentage of the house expenses against that income. But then, you lose part of the principal residence exemption when you come to sell the house. For example, 1/5th of the house might be considered rental, so 1/5th of the capital gain/loss would have to be reported. It would be up to you to keep track of what you paid for the house and land, how many years would be considered rental, and how much would be considered capital gain/loss when you sold.

Any net profit would be added into your income and taxed at whatever rate you fall into.

If you are renting to a friend who will help out with the expenses, then this is not necessarily considered rental income, as you would not intend to make a profit on the situation. No income would be claimed by you or credits claimed by him. I don't know if Manitoba has a rental/property tax credit like Ontario does, so I am speaking from an Ontario point of view.

If you have a lease agreement, this leans more towards a rental agreement, so make sure you charge enough in the first place. Add up your expenses, prorate them, and charge enough to at least cover these. Make sure you have a very clear agreement about the groceries. Who buys, who cooks, who cleans up, do you put names on stuff in the refrigerator?

If you are friends, this could get complicated. Make sure both of you have an exit strategy in case the friendship goes south.

[Spudd]

It's complicated, I can't attempt to answer this in detail since I don't know the exact rules. But essentially, your friend might get a tax break for paying rent (in Ontario you do if your income is low enough). The rent he pays you is income to you, but you can deduct some costs from it, basically his share of the mortgage interest, heating, property tax, etc. I believe it would be based on the % of the floor space his room takes up but I am not sure.

[MoneyGal]

http://www.cra-arc.gc.ca/E/pub/tg/t4...DME.html?=slnk

Read up on this first. If you declare rental income, yes, you can write off a percentage of the house expenses against that income. But then, you lose part of the principal residence exemption when you come to sell the house. For example, 1/5th of the house might be considered rental, so 1/5th of the capital gain/loss would have to be reported. It would be up to you to keep track of what you paid for the house and land, how many years would be considered rental, and how much would be considered capital gain/loss when you sold.

Any net profit would be added into your income and taxed at whatever rate you fall into.

If you are renting to a friend who will help out with the expenses, then this is not necessarily considered rental income, as you would not intend to make a profit on the situation. No income would be claimed by you or credits claimed by him. I don't know if Manitoba has a rental/property tax credit like Ontario does, so I am speaking from an Ontario point of view.

If you have a lease agreement, this leans more towards a rental agreement, so make sure you charge enough in the first place. Add up your expenses, prorate them, and charge enough to at least cover these. Make sure you have a very clear agreement about the groceries. Who buys, who cooks, who cleans up, do you put names on stuff in the refrigerator?

If you are friends, this could get complicated. Make sure both of you have an exit strategy in case the friendship goes south.

Not if you rent less than 50% of the square footage of the home or if you do NOT claim CCA.

[MoneyGal]

See also this old thread: http://canadianmoneyforum.com/showth...-own-the-home)

[Brenner]

Honestly you should just keep this simple, consider it cost sharing and claim no income but give no rent receipt. When it comes to friends and family living with you this is a perfectly fine arrangement according to CRA, you aren't in the business of renting. You friend is just giving you $400 as for his share of the bills.

Making a lease and giving receipts is just making way more complicated than it needs to be. Sure your friend loses the tax rebate if he is even eligible, but it would cause you a tax liability. Having a lease might also be a bad idea, not sure why they see the need for it? As far as I can tell you are doing him a semi favour letting him live there, you should retain the right to boot him at any time. I would not give him the protection of a being a tenant in which you might have a hard time evicting. Supposively your are good friends so there should be a basic trust there that he wont be a problem and that you wont boot him without reasonable notice without the need for a lease. But once you give him a lease it will go from you doing him a favour, to him having a legal right to live there.

[MoneyGal]

I don't know about provinces other than Ontario, but in Ontario this person would not be a tenant but a roommate. http://www.ltb.gov.on.ca/en/Key_Info...02_111462.html

[sharbit]

Not if you rent less than 50% of the square footage of the home or if you do NOT claim CCA.

IMO,Its best to avoid claiming CCA to retain your residence exception. If you claim CCA it will be subject to recapture later on plus capital gains. Just claim the income on your return; there are certain expenses you can write off - I don't remember what they are anymore.