When rental losses get personal

National Post


Each month the Tax Court is full of cases where taxpayers are attempting to write off seemingly personal expenses as commercial expenses. This month is no exception.

Take the recent case of Paulo Salgado, who in 2003 and 2004 claimed rental losses of $5,800 and $3,400, respectively, on his tax return relating to one of two houses he owned those years.

Mr. Salgado purchased one of the houses in 2002, and it remained vacant while being renovated. In 2004, Mr. Salgado, his girlfriend and his parents moved into the home.

Mr. Salgado argued that he should be permitted to claim a portion of various home expenses as tax deductions on his personal returns since the house was partially a rental property. His explanation was that he charged his girlfriend rent for the use of a bedroom in the home.

As it turns out, that bedroom was also Mr. Salgado's, although he argued that he often slept on the sofa and not in the bedroom.

While taxpayers are entitled to claim legitimate rental losses, the Supreme Court of Canada in 2002 issued some guidelines on when such losses should be deductible.

In the so-called Stewart decision, the top court introduced the approach that should be followed to determine whether a taxpayer's activities constitute a source of income. The starting point is to ascertain whether the taxpayer's activity is undertaken in "pursuit of profit" or is personal. Where there is a personal element, the activity must have a sufficient degree of "commerciality" to be considered a source of income.

Since Mr. Salgado, his parents and his girlfriend were all living in the house, there seemed to be an obvious personal aspect.

Having concluded that a personal element existed, the next step was to determine whether the arrangement was sufficiently commercial

Mr. Salgado claimed that the fact he reported $1,920 of rent for the amount he charged his girlfriend in 2003 and 2004, this was evidence of commerciality.

The judge termed this "problematic," since his girlfriend did not live at the property at all during 2003. In fact, said the judge, this was clear evidence of the "non-commercial" nature of the arrangement.

Finally, Mr. Salgado argued that since he and his girlfriend kept their assets separate, their arrangement was commercial.

The court disagreed, calling their relationship a "personal one" and denied his claim for rental losses on this property.