Realtor Brian Keller has been a landlord for 23 years and, after reporting losses on his 2021 tax returns relating to his rental business he received a questionnaire from the CRA asking how he planned to turn his rental operation into a profitable enterprise.Illustration by The Globe and Mail
There are hundreds of thousands of rented homes that do not turn a profit for their owners, but if you’re a landlord looking to the Canadian Revenue Agency for a tax break on those losses you can expect to have to answer some tough questions on your investment.
Realtor Brian Keller has been a landlord for 23 years and, after reporting losses on his 2021 tax returns relating to his rental business he received no updates until almost a year later when a six-page questionnaire arrived in the mail.
“Provide a detailed projection of how you intend to develop your rental operation into a profitable enterprise,” the letter from CRA reads, among other things.
“I can’t believe the audacity of Revenue Canada to ask me for a business plan,” Mr. Keller said. “And they want it in 20 days. This is almost an act of intimidation.
“I understand audit and ‘Hey, show us your expenses’ … but I’ve never had a letter from the government saying ‘provide a detailed projection.’”
Mr. Keller has owned multiple residential rental properties in Ontario since 2000, starting with a couple of houses in the Barrie, Ont., area. While most years were profitable, from time to time he has reported and claimed losses on his taxes related to management of his rentals.
This is the first year he has received a letter of this kind.
“Those letters have been around for years and years, that’s nothing new,” said George E. Dube, CPA, CA, who specializes in real estate taxes at the BDO Canada accounting company. “For the most part, Revenue Canada is pretty reasonable with the rules for real estate investors. [For example,] they will allow us to deduct the costs of interest on mortgage payments.”
According to Mr. Dube, the CRA’s main goal in asking questions like those posed to Mr. Keller is to assess what kind of business the person is actually in. “Were you really in the business to generate rental income, or were you in the business of buying these [rentals] to sell them down the road? Did you buy the apple tree to pick the apple and sell the apple or did you buy it to cut it down for logs?” Mr. Dube said.
In other words, if your investment is a condominium where rents and expenses don’t cover your carrying costs but you are hoping for windfall profits when you sell the asset, then, from CRA’s perspective, you are a property speculator with a side hustle as a landlord.
Mr. Keller says his losses come from non-paying tenants and long delays at Ontario’s Landlord and Tenant Board that have resulted in more than $12,000 in unpaid rent.
In 2023, Statistics Canada reported that data from tax filings showed 1.35 million Canadian households reported income from rentals in 2020 and 76.3 per cent said their operations were profitable. That leaves about 320,000 individuals with rental income in the red.
A recent report from market research firm Urbanation and CIBC showed that even newly completed condominiums in the Toronto region were often unprofitable. The survey looked at 6,378 new condominiums completed in 2022 that were then rented on the local Multiple Listings Service. Of all the new units with a mortgage, only 48 per cent were making enough money to cover the costs of ownership.
About 39 per cent of the condos in the Toronto region are owned by investors who rent them out, according to Urbanation. The report says that while rental rates soared in 2022, so did mortgage rates, particularly affecting those who borrowed with a variable rate loan.
“The distribution of newly completed condo rentals by cash flow position shows that the highest concentration (14 per cent) of investors was losing $1,000 or more each month, with a one-third share of investors experiencing negative cash flow of $400 or more,” the report reads.
Mr. Dube said the CRA will often demand answers from landlords claiming losses who are also renting to a relative (on the suspicion that the losses stem from below-market rents.) But in most other cases, if a landlord can’t show they have any plans to make their units profitable, the losses will be denied.
“Why should the government of Canada or the taxpayers fund your lifestyle?,” said Mr. Dube. He warns that it is better to avoid filing claims that are likely to later be denied. “This starts to become a bit punitive: maybe we’re five years down the road and you’re paying back those taxes, plus some interest to Revenue Canada and other penalties.”