Revenue Property - Cottages & COVID

My clients purchased 2 cottages in early 2020 for renting out to ice fishermen (US primarily) and summer rental. COVID put a dent into it. They used one property for themselves for 6 weeks during summer of 2020 and limited rental income due to border closure etc. Cottage #2 was an expense for upgrades and maintenance NO income but capital expenditures and upgrades.

How would the personal use be claimed against maintenance, capital costs, etc.? Would I apply losses against personal income or carry forward?

Thank you,

I assume these are co-owned personally (not a partnership and not a corporation) and a T1 is the proper place to be filing the results. There may be very little to deduct from Cottage #2 as an expense if it wasn’t available to rent (due to the upgrades being done). Also, the upgrades and other costs may have to be capitalized. You’ll have to check that out.

The personal use of cottage 1 can be calculated a number of ways. A more restrictive view is to pro-rate the 6 weeks of personal use over the reasonable rental period for the year. Since the market is ice-fishing, they might be able to pro-rate the personal use over the entire ownership period in 2020. Anytime personal use involved, reasonableness is the key. Unreasonable losses will attract CRA’s attention.

As for the use of any losses, there are too many variables to speculate on the best approach. Look at their respective tax brackets, past, and future income prospects.

The only thing I would add is to remember that all the information to date is important. So with this year being wide open and US hunters coming back in droves. If they have a great year this year, it really adds to the argument about the nature of the enterprise, but if they have another year where nothing happens, they could perhaps call it sunk costs and claim it as property development and consider the costs part of holding the buildings while fixing them up for sale.