Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Where a taxpayer rents space in his home to his company, can he charge rent based on the utilities and telephone bill.
Position: Yes, as long as the expenses claimed against this income are reasonable and incurred to earn income.
Reasons: As per the guide T4036, Rental Income.
XXXXXXXXXX 2002-014311
Cornelis Rystenbil, CGA
July 23, 2002
Dear XXXXXXXXXX:
Re: Rent for space used by your company
This is in reply to your letter of May 27, 2002 wherein you requested our comments in respect of your proposal that your company pay you rent for the space used in your home and out-building equal to your monthly utilities and telephone bills. You are of the view that this amount would be comparable to the result obtained by taking the square footage used by the company divided by the total square footage of the house (including the out-building) and multiplying the result with the total household expenses.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject of an advance income tax ruling request submitted in a manner set out in Information Circular 70-6R5. As stated in paragraph 22 of Information Circular 70-6R5, written opinions are not advance tax rulings and, accordingly, are not binding on the Canada Customs and Revenue Agency. The following comments are, therefore, of a general nature only.
There is no provision in the Act that would prevent you from charging your company a reasonable amount of rent for its use of the space in your home. This rental income will have to be included in your income.
Under section 9 of the Income Tax Act (the "Act"), income for a taxation year from a rental property is the taxpayer's profit from that property for the year. The income so determined is subject to a number of specific provisions in the Act which serve to expand or limit the scope of what is included in income and what is deducted as an expense for income tax purposes. By virtue of paragraph 18(1)(a), an outlay or expense must be made or incurred for the purposes of gaining or producing income to be deductible in computing income from a business or property. Under paragraph 18(1)(h), personal or living expenses of the taxpayer, other than expenses incurred by the taxpayer while away from home in the course of carrying on the taxpayer's business, are prohibited. Finally, even if an expense is otherwise permitted by the Act, an outlay or expense may be denied pursuant to section 67, to the extent that it is not reasonable in the circumstances.
Any expenses claimed against your rental income must be incurred to earn the rental income. In determining the expenses that may be deducted in computing your rental income, the square footage of the portion of the total area used for the income-earning activity divided by the square footage of the total area may be a reasonable apportionment of the applicable household expenses to arrive at the deductible amount. If the particular space is also used personally, a further reduction of that proportion will be required in respect of the amount of time the space was used for non-business purposes. We also note that you included the mortgage payment in the household expenses. As stated in the guide T4036 - Rental Income, you cannot deduct the repayments of principal on your mortgage. Only the interest portion is allowed.
As indicated, these are general comments only. In determining whether there are any other factors that may have to be considered in computing your rental income, we recommend that you review the enclosed guide T4036 - Rental Income. Please note that you can obtain most of our publications on our website at www.ccra.gc.ca.
We trust our comments will be of assistance to you.
Mickey Sarazin, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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