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It seems like nearly everyone you talk to these days is a landlord or is thinking of becoming one. While some of us may simply rent out our basement to bring in extra income to help cover the mortgage, others are forgoing more traditional retirement savings vehicles such as RRSPs and TFSAs for the allure of investing in residential real estate. After all, why not collect some rental income to help offset some of the expenses with a view to disposing of the real estate in a future year, hopefully at a significant profit?
Some people even boast of the tax benefits associated with being a landlord, as they seek to use any rental losses generated from their rental properties to reduce taxes owing on other income, such as employment or business income.
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But you need to be careful if your properties don’t generate enough income to cover the associated expenses as the rental losses that you are generating may not be tax deductible. The Canada Revenue Agency (CRA) has said that if, for example, you rent out a part of your home and your expenses exceed your income, you cannot claim your expenses if you have no reasonable expectation of making a profit. So, if your expenses exceed your income on a consistent basis, you may not be able to claim any losses.
If you choose to rent your property at less than market rates, for instance if the tenant is a personal friend, and you do not cover your expenses, no loss can be claimed for tax purposes. Only if your friend pays the same amount as you would charge any tenant (i.e. fair market value rent), and you expect to earn a profit, would you be able to deduct a loss against your other income.