The Canada Revenue Agency (CRA) disallowed the rental losses of a taxpayer after he rented his home to his mother at discounted rent. The CRA did not hold the scenario as an actual income-generating rental business but more as an in-person, as compared to a commercial, deal.
This choice introduces the need to treat rental properties as businesses, even within transactions among close family members.
CRA doesn’t allow taxpayer to claim thousands in losses while renting to his motherhttps://t.co/roO9zTZJpD pic.twitter.com/UNv0CjPBrM
— Financial Post (@financialpost) July 10, 2025
Why the Claim Was Denied
The homeowner disclosed numerous thousands of dollars of rental losses on his or her tax return. Since the rent charged by the mother was substantially lower than market value, however, the CRA concluded that there was no commercial intent in the case.
The agency determined that the arrangement did not meet minimum standards for a valid rental activity. The taxpayer’s claim for loss was thus denied.
CRA’s Guidelines on Rental Income
The CRA distinguishes between personal arrangements and rental activities undertaken for profit. For you to claim it in an income tax basis, the property has to indeed be utilized for purpose of generating income. If renting it to a relative at a sub-market rental rate, it will most likely qualify as personal use, especially where there is no record keeping or profit motivation.
The CRA uses the Profit Motive Test and the Arm’s-Length Test in such cases. The question to ask first is whether there was a wish on the part of the landlord to earn a profit on the rent. The second question is whether the rent terms approximated those of an arm’s-length landlord-tenant relationship with an unrelated party.
Here, the CRA concluded that both tests were failed. The rent was well below market, and the agreement was poorly documented to reflect the fact that it was an arm’s-length business transaction.
Real-World Implications for Taxpayers
When rental loss claims are denied, the repercussions can be costly. The taxpayer might have to repay any tax refunds which were obtained from the disallowed deduction. Interest and penalties might also be charged against the due amount, especially if the CRA considers the error was not made in good faith.
These decisions also place similar arrangements into question. Any tenant who is renting to a relative, parents, siblings, or kids, may be open to scrutiny if the rent is not in today’s market value.
What Renters and Landlords Must Know
For anyone who wishes to claim tax deductions pertaining to rentals, it is crucial the contract be written professionally. Some guidelines include:
- Charge market rent: Compare local postings to discover what comparable property is leasing for in your area.
- Use a written lease: Create a written rental agreement with rent payments, payment schedule, term, and duties.
- Keep clear records: Hold on to receipts for rent paid, utility bills, maintenance, and repairs.
- Advertise if possible: Public posting of your property, even renting to a family member, may serve to prove fair-market methods.
- Avoid sweetheart transactions: If you rent to a relative below fair market value as a gesture of goodwill, don’t expect to be able to deduct rental losses.
MY VIEW: Waiting for @CMRobertWhiteDC and the council’s Committee on Housing to mark up @MayorBowser‘s RENTAL Act.
As @WashInformer reported, CM R. White removed the bill from the BSA and changed her proposed restriction on TOPA eligibility. More to come. pic.twitter.com/Tf03VwDVb7
— Sam P.K. Collins (@SamPKCollins) July 9, 2025
Why Market Rates are Necessary
It is evident under CRA taxation policy that rental losses only apply where the rental property is being utilized to earn income. Renting below market, especially to a relative, questions whether or not the enterprise is commercial in character.
Even where the renter is paying some sort of rent, the CRA is able to deny deductions where the rent is nominal or non-commercial.
CRA’s Broader Perspective
The goal of CRA is to ensure that tax deductions are for real business expenses. Where someone is really subsidizing a relative’s living accommodation, the tax system isn’t supposed to repay that generosity with deductions for real rental businesses.
This is particularly relevant in Canada, where adult children or elderly parents live in family homes on an informal basis. While the intention may be kind or altruistic, the tax authorities will not allow such arrangements to be treated as arms-length rentals.
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How to Handle a CRA Reassessment
If the CRA rejects a rental loss claim, here are your options:
- File a protest: You may protest if you believe the assessment was incorrect, utilizing the CRA’s formal resolution process.
- Fix prior returns: If it is not your first year filing rental losses, you may be required to fix prior returns to avoid further penalties.
- Consult with a tax professional: A tax attorney or accountant will be able to advise you if your situation still meets under some constructions.
If you’re renting out a room in your house or other building, even to someone you know or a friend, do the following to stay in compliance:
- Study the market and set fair rent.
- Use an extensive lease contract.
- Precisely document rent collected and expenses.
- Report taxes correctly with accompanying documentation.
- Research registering the property as a formal rental with your municipality.
Why This Case Matters to So Many Canadians
Most households offer relatives low-cost accommodations, especially during periods of economic hardship. But that experience serves as a reminder that tax law and charity aren’t always buddies.
By not making the arrangement official, even the most well-intentioned homeowner can find himself on the wrong end of a CRA audit.
Extremely concerned to hear that families in Croydon are being refused rental properties by Croydon letting agents because they are on Universal Credit.
This is illegal, as court cases backed by @Shelter have ruled.
Croydon letting agents: this must stop. pic.twitter.com/vak4tjd97n
— Sarah Jones MP (@LabourSJ) July 15, 2024
Final Thoughts
Something is certain about the client’s situation: if you do deduct rental losses on your return, you must be running your property as a business. That means charging arm’s-length rent, maintaining proper records, and treating tenants, even if they’re family, to a business arrangement.
It’s a reminder that the CRA is less concerned with intentions than with records, intent of profit, and observance of fair-market practices.
If you’re renting to a relative, handle it with caution. What might seem like a favour in the house can prove expensive on your tax bill.
