New client to me - New immigrant 7 years ago, was taught how to use Ufile via a new immigrant re-settlement course and has been using it till now.
2017 bought a single family home to live in with their parents, and brother’s family (3 family units under one roof). 2017 - 2021 has been Ufiling taxes claiming rental income on 50% of home because it is shared with family, and they help pay the mortgage - this rent is at approx 60% of current market rent- keep in mind whole home is shared - no separate in-law or self contained unit.
2022 (after claiming rental income for 5 years on taxes) - other family units move out to a new home so no rental income but now there is a deemed change in use.
No CCA was ever taken on the property
The property was not purchased with the intention of it being a rental business or generate income
Rent was always below market value and rented to direct family members
no structural changes were made on the property
Would capital gains be deemed on 50% of the property for the 5 years in this situation?
Best route is to send client for an appraisal and file the subsection 45(3) election, or do I have any other options?
review 2017 to 2021 returns - maybe do T1Adj for those years to remove rental income so no change of use applies. It was not a rental, it was sharing of expenses. If the owner can verify the intention of the original purchase, they should be able to avoid Change of Use. But that is only my thought. I obviously stand to be corrected but that would be my thought.
“taught how to use Ufile”
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But NOT taught the several THOUSAND pages of the actual INCOME TAX ACT…
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. “this rent is at approx 60% of current market rent”“(after claiming rental income [LOSSES] for 5 years on taxes)”
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He/they have been incorrectly reporting rental losses from 2017, 2018, 2019, 2020, 2021.
Each of those years need to be adjusted and reassessed to remove those rental losses.
This was scamming the system.
Quite possibly, it has also been resulting in the improper receipt of large amounts of incorrectly received benefits over the years (GST credits etc). (For which our old friends, S238 and S239 (quoted in other threads), provide very severe penalties, including jail, if this was done on purpose).
Actually, they have been claiming the income with almost no deductions because this lovely course was so great at teaching New Canadians to navigate the tax system and be independent.
So yes - refiling is possible - but it would result in the elimination/reduction of income…and reviews as this would NOW trigger refunds etc.
Oh yes - net income because they were not aware they could use any deductions (I have reviewed the past returns they did themselves)…so each year had about $9000 NET rental income they paid income tax on. I guess these courses must be government funded as the returns sure turn out in their favor.
This is where, I feel the CRA will be kicking and screaming if I re-file to claim there was no rental income on those years…or re-file with proper expenses (can’t guarantee they will break even) and then try to claim no rental/change of use. I feel like I’m cracking open a can of worms here …
You probably are…but you would really be correct in doing so for several reasons:
if rented as a profit-making enterprise (which it wasn’t) and expenses weren’t claimed (as they were not) then the taxpayer is entitled to do so. CRA may, or may not acceded to a request to allow expenses.
if only “shared” and used as a “defrayal of expenses”, as you say, then no income should have been reported. Once again CRA may, or may not acceded to a request to delete the income. You need to be VERY careful that this is not tax-planning in hindsight.
You should likely be prepared to show what market value revenue could have been in each of those years to establish that it was below market, at the very least.
Regardless, there is little you can do if CRA refuses to honour the request to delete the income…
The PRE discussion may well need to wait until the ‘rental’ one is determined.
Re-filing all those years may very well open a huge can of worms. Is your client still living there? Perhaps there is no change in use at all and the entire home is his PR for the whole time?
Homeowners who rent out their basements to help with expenses are still able to claim the full PRE as long and the rental space and rental income are “incidental” to the overall space and expenses of the home (other rules are no CCA and no structural changes). I have not been able to find a definition of “incidental” but I have some clients who rent out their basements and we try to keep it under 40%.
In your client’s case, it was only 50% and since the rent was below market, was it incidental to the overall costs to run the home? I think you have a good case in claiming the full PRE, no change in use… thoughts?
See 2.11 of the folio " With regard to whether the main reason for owning a housing unit is to earn income, a person receiving only incidental rental income from a housing unit is not considered to own the property mainly for the purpose of gaining or producing income"
as the returns sure turn out in their favor.