One month rent (compensation) to tenant and legal fees incurred

Tax Topics
1

Working on T776 for a 2022 tax return (late).

Taxpayer was living at home with parents while a property they owned was being rented out to tenants.

She eventually needed to sell it to purchase her own home.

She had to pay current tentant one month’s rent (mentioned sje used an N12) and incurred legal fees because they had to hire a lawyer to assist (tentant were giving her issues).
The purchaser of the property took both title and occupancy.

Two expenses incurred:

  1. $2,500.00 payment to the tentant as per N12 (one month rent)
  2. $3,000.00 legal fees paid to a lawyer to assist in legal process (this is completely separate from the fee to sell the property)

I have entered the two above expenses in T776 see screenshot below (other info will be entered shortly).

T776 EXPENSES
T776 EXPENSES1471×951 372 KB

Is this how others have treated these expenses in a similar scenario?

2

Sounds more like costs associated with the sale than on account of rental income.

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3

Legal fees would be outlays/expenses of capital gain /loss reporting on schedule 3.
Sale of property must be reported to cra.

Decrease the rental income by the amount “reimbursed”… it is not an expense as such.

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4

That makes sense for the legal fees.
RE the one month paid to the tenant you’re saying to reduce gross rents by that amount?

5

When asking a tax question (and this goes for questioning a tax client) you need to be VERY specific and accurate.

For a reader here, your post is unclear on two salient points:

“Payment to tenant”: was this an actual cash transfer to the tenant, or was it foregone rent? (In BC eg, upon notice, the tenant gets a free last month…this is NOT a payment and is simply foregone rent and, as such, has no reporting spot on the return…it is simply not included as income). OTOH, if a tenant is actually PAID CASH to leave early, that is a very different story.

“Legal expense”: Similarly… " incurred legal fees because they had to hire a lawyer to assist (tentant were giving her issues)." is unclear. Was this to evict the tenant (non-deductible, or at best an outlay on capital account), or to collect rent (deductible agains rental income) or for some other reason (could be deductible, could not be, depending on circumstances).

The devil, as I’ve often said, is in the details. Nuance matters. Descriptions matter. Accurate explanation of situations matter…because each can lead to a different outcome.

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