# To claim or not Rent from the basement?



## Nadya (Feb 28, 2011)

Hello,

I have been renting a basement suite for the last few months. Now I'm not sure if I should claim the income or not. The reason is that the basement suite may not fully comply with the 'city rental code' (Calgary).

Can someone please explain pros and possible consequences of the claim?

Thank you!


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## kcowan (Jul 1, 2010)

The CRA does not care about city codes. They do care about income from all sources. Are you charging and remitting GST on the rent? Do you have a Business Number. (Probably not required as under $30k.)


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## I'm Howard (Oct 13, 2010)

Welcome to the Underground Economy, I bet most people who rents out rooms or basements do not declare the income.

The caveat is a disgruntled tenant informing on you, but if you do the math for all the deductions, you may actually have a capital loss.

Revenue Canada have nothing but time and rental income could become a taxation nightmare .

HST on over $30,000.

Talk to an accountant, get all ino, property taxes, interest on mortggae that could be alloctated to basement, cost of renos etc etc etc.


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## Rico (Jan 27, 2011)

kcowan said:


> The CRA does not care about city codes. They do care about income from all sources. Are you charging and remitting GST on the rent? Do you have a Business Number. (Probably not required as under $30k.)


I thought there was no GST on rent . . . but +1 on having to claim the income if you are charging enough to make a profit. The pros of the claim are not getting penalized or going to jail for tax evasion (if it ever came to that). The consequences are that after calculating rent income minus expenses (mortgage interest, property tax, insurance, etc. for the ratio of the basement to the house) you'll have to pay tax at your marginal rate on the difference.

Refer to this guide: http://www.cra-arc.gc.ca/E/pub/tg/t4036/README.html


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## Nadya (Feb 28, 2011)

Thank you all for replying. I was hopping for the answers you gave me as it actually turns out to be good for me to claim the rental income. 

I do not charge gst on the rent. I do not think any income has gst on it. I believe only goods and services have gst added.


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## jamesbe (May 8, 2010)

If your tenant claims the rent you better too!


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## I'm Howard (Oct 13, 2010)

A Fine would priobably result, not jail, best bet, do all the Math and file .

No HST on Rent.


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## rookie (Mar 19, 2010)

what about the deductions you make for room and board to a live-in caregiver? should you claim that as rental income?


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## Rico (Jan 27, 2011)

I'm Howard said:


> A Fine would priobably result, not jail, best bet, do all the Math and file .
> 
> No HST on Rent.


I was just being a bit facetious.


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## Guest (Mar 1, 2011)

Nadya said:


> Hello,Can someone please explain pros and possible consequences of the claim?
> Thank you!


On another note, should there be say a fire, your insurance company would be very interested in finding out there are renters in the house ... I suggest discuss the extra cost with your home insurance provider ... it's not that much considering the consequences of not being insured ... my cost is an additional $35 per person.


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## Plugging Along (Jan 3, 2011)

rookie said:


> what about the deductions you make for room and board to a live-in caregiver? should you claim that as rental income?


This is not for profit. You do not need to claim this. They are paying for a part of their living expenses.


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## Eclectic12 (Oct 20, 2010)

I'm Howard said:


> Welcome to the Underground Economy, I bet most people who rents out rooms or basements do not declare the income.
> 
> [ ... ]
> 
> Talk to an accountant, get all ino, property taxes, interest on mortggae that could be alloctated to basement, cost of renos etc etc etc.


Interesting question ... I'm not sure if there's info on this.

Way back when I rented a room of my first house, everyone I talked to at work said they were claiming the income on their tax return.

No one currently at work is renting. One guy is a "buy, fix, rent until the house goes up in value, sell" type. Since he doesn't live in it, he also says he claims the income. He's currently out of the market as he doesn't like current price (and I suspect the addition of another child has slowed him down).


+1 on talking to the accountant.

Cheers


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## Nadya (Feb 28, 2011)

I told my insurance that I have renters and they are ok with that.


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## ghostryder (Apr 5, 2009)

kcowan said:


> The CRA does not care about city codes. They do care about income from all sources. Are you charging and remitting GST on the rent? Do you have a Business Number. (Probably not required as under $30k.)



No GST on residential rent


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## sprocket1200 (Aug 21, 2009)

Nadya said:


> I told my insurance that I have renters and they are ok with that.


of course they are. without that in writing they will never have to pay out on any of your claims for any reason. you would be better off self insuring.


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## iherald (Apr 18, 2009)

I would declare it since you can then write off a portion of your expenses (taxes, etc). Plus, if the tenant tries to get a rent rebate on their taxes (I'm not sure how that works, but it's a box you can click) you can get hit by the CRA saying "ah ha!"


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## OhGreatGuru (May 24, 2009)

This is kind of one of those Catch 22's. Technically all rental income has to be declared, subject to the exception about "Renting below fair market value"

_You can deduct your expenses only if you incur them to earn income. In certain cases, you may ask your son or daughter, or another relative living with you, to pay a small amount for the upkeep of your house or to cover the cost of groceries. You do not report this amount in your income, and you cannot claim rental expenses. This is, in fact, a cost-sharing arrangement, so you cannot claim a rental loss._

But in practice, most "basement suite" rentals are unlikely to be operating at any taxable profit, after you deduct all your allowable expenses. I suspect this is the main reason CRA is usually turning a blind eye to this underground economy.

So IMHO it's a question of risk tolerance. Do you want to file all the paperwork for no net tax in order to keep everything above board? Or do you want to just keep all your receipts in case CRA does come calling, but in the meantime ignore them? And your future plans may come into play - is it likely you would in future rent out more than just one part of your house?

Of coure, if you are making a profit, because your house is fully paid for, and rents are high in your market, the equation changes.


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## bean438 (Jul 18, 2009)

I recall on the CRA web site (I couldnt believe i was reading it, maybe the site was hacked?) but I cannot find the info anymore, perhaps moneygal can find it. She is the best at this kind of thing.

Any way the jist of it was that if someone lives with you and you are not charging them rent, but they are chipping in to pay utilities, food, etc as a way of saying thanks for letting me crash here, then you dont pay taxes.

I really wished I had book marked it because I thought it was really odd that CRA would not want to collect tax on something.

There was also a dollar amount around 600 or so a month as a guideline.

Makes sense to me because I dont owe tax if I let a friend stay at my place. If he wants to pay the cable bill that is up to him.

Likewise if he wants to take me out for supper that is his business too.

I am guessing the real reason CRA will not pursue this is that if we pay tax we can also deduct, and the head ache is not worth it.


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## Plugging Along (Jan 3, 2011)

I know I had my best friend living in our basement suite (same place we were living). I was told by our accountant that we did not have to claim the tax in our case.

The reason was, the amount $200/month (way way below market value), and it included all utilities and everything, including some food. There was no profit involved, and I would have taken a loss. My intent was not for profit but merely having a roommate who lived in my basement.


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## MoneyGal (Apr 24, 2009)

Here's a little more information on this scenario. There are a couple of Supreme Court and Tax Court cases which involve the deductibility of rental losses directly. 

What CRA and the tax court will look for is evidence whether a rental arrangement is commercial, or has a personal element mixed into it. 

If you have a source of income, you are allowed to deduct reasonable expenses associated with earning that income - and if your income arises from an endeavour which is "clearly commercial" in nature, the standard REOP test ("reasonable expectation of profit") cannot be applied. 

That is, when an endeavour is clearly and solely commercial in nature, there is no room to apply the REOP test to disallow losses. 

However, the moment there is a personal element mixed in (such as renting part of your home where you personally live), the REOP test can be freely applied. 

What this means is that if you are renting part of your home and have persistent losses, those losses may be disallowed. (When you have rental losses, you can apply them against other income, thereby reducing the amount of tax you would otherwise pay.)

The "cost-sharing" definition (described above; OGG didn't link but provided the exact CRA wording) is meant to clarify situations in which you have family members and/or personal friends living with you - it is not intended to cover strangers living in your space for (intended) profit. 

You are expected to report all sources of income. If you have expenses which exceed the income and would give rise to a loss if reported and deducted, you can expect the losses to be disallowed if the space you are renting is part of your home. 

In short: CRA's position is that all sources of income must be reported. How you deal with deductions against that income is between you and whoever prepares your tax return for your signature. 

The court cases (for further reading) are Stewart (2002 SCC 46) [Supreme Court] and Milan Opacic and Dragica Opacic v. The Queen (2010 DTC 1079) [Tax Court]. They provide more detail on how the courts think about losses, with the Opacic case focussing specifically on rental losses.


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## Nadya (Feb 28, 2011)

Here is one more question related to this:

I purchased new appliances (fridge, ranger..) for us and took the existing once to the basement suite. Would I be able to claim any of that?
I am not sure how old ware the existing appliances but if I am to judge by the look, then probably 4-6 years.

If I am, what amount should that be?


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