Income attribution (Real estate rental)

I have a question regarding the income reporting of a rental property.

Here are some preliminary facts:

  • 2017 - Couple purchased and moved into a property

NOTE: The husband made the entire initial investment to acquire the property (down payment).
The husband owns 60% and the wife 40%

  • 2019 - The couple got married

  • 2020 - The married couple moved out of this principal residence property and started renting it to tenants (they moved back home with their parents to be closer to work)

Would the right course of action be to claim 100% of rental income on the husband’s 2020 tax return based on the initial investment OR a 60% / 40% split on their respective returns based on ownership? Are there other variables that could play into this? For example, if they both paid the mortgage and bills?

I realize there was a change in use from principal residence to rental property in 2020. However, the property was not sold in 2020 and the 2020 tax return is the one that needs to be completed at this time.

There is no hard and fast rule for the percentages to claim. BUT, once the split has been determined, don’t change it down the road as that will attract an audit flag.

You need to analyse the entire tax situation. Start with tax payable without the rental. Who would benefit from a rental loss? Is there a possibility that expenses will exceed income for a long time?

They need to make sure that any rental losses are not continuing long term (reasonable expectation of profit), so my rule of thumb is that if they are both in the same tax bracket, no pending babies coming to take her out of the income earning pool, and rent is creating near zero taxable income - split it 50/50. If she is going to be producing babies, tilt the table to her to reduce tax payable during those years - but keep in mind that this split is forever.

At the end of the day it’s up to them how they want to report it, and in my experience they usually say 50/50 works for them.

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In 2017, before they were married, your information says they were a “couple” but were they common-law? Attribution can apply in this situation but I tell my clients that attribution can be a difficult thing for CRA to invoke in these days of most double-income families. I haven’t seen CRA raise an attribution claim in many years, perhaps since it’s not as common as in my parents’ days when my father worked out of the home and my mother raised six crazy kids. It’s also likely not a politically worthwhile claim for CRA to make these days.

Attribution is based on the source of the funds. Paying bills from the wife’s assets would help but the husband’s payment of the down payment would swing things his way.

Without knowing more of the finances of your clients, it’s difficult to answer this question. My answer would be much like that of @dklassencga, that they might wish to claim 50/50 or some other defensible claim but they should stick with that claim in future years.

Apologies for the delayed response, I was out with a nasty cold for two weeks and then had two weeks of non-stop catch-up.

@dklassencga Thank you for your reply
@kevin To answer your question yes they were common law in 2017.

  • 2014 - Started dating
  • 2015 - He purchased a condo and then she moved in (technically they become common law in 2016)
  • 2017 - He sold condo purchased in 2015 and bought another condo together (he makes down payment)
  • 2019 - Married
  • 2020 - The married couple moved out of this principal residence property and started renting it to tenants (they moved back home with their parents to be closer to work)