1 March 2013 External T.I. 2013-0475101E5 - Statement of Real Estate Rental

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.

Principal Issues: Whether the owner of a rental property can deduct certain expenses that were incurred during a period when the property was vacant.

Position: Generally yes, assuming such expenses would have otherwise been deductible when the property was rented.

Reasons: General legislative framework.

XXXXXXXXXX N. Pulandiran
2013-047510

March 1, 2013

Dear XXXXXXXXXX:

Re: Deductibility of Rental Expenses

We are writing in response to your letter of January 14, 2013, wherein you requested our views on whether an owner of a rental property could deduct expenses that would otherwise have been deductible, such as heating, water and electricity, in computing income under the Income Tax Act (the "Act") where the expenses were incurred when the particular property was vacant while the owner was attempting to find a new tenant.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency publications can be accessed on the internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office ("TSO") during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year.

Notwithstanding the foregoing, we are prepared to provide the following general comments that may be of assistance.

Paragraph 18(1)(a) of the Act provides that no outlay or expense is deductible in computing the income of a taxpayer from a business or property, unless it was made or incurred for the purpose of gaining or producing income. Paragraph 18(1)(b) of the Act also provides that capital outlays are not deductible unless they are expressly permitted under Part I of the Act. Paragraph 18(1)(h) of the Act denies the deduction of personal or living expenses incurred by a taxpayer. The deductibility of any outlay or expense is also subject to the general rule in section 67 of the Act that such amounts be reasonable in the circumstances.

While, as noted above, the deduction of the particular expenses you describe remains a question for your TSO to determine, generally speaking, where a particular property continues to be held for the purposes of earning rental income (that is, its income earning use has not changed while the owner is in the process of actively looking for a new tenant and it is reasonable, based on the particular facts and circumstances, that a new tenant can be found), the types of expenses that would otherwise have been deductible in computing income from that property would not cease to be deductible simply because the particular property was vacant for a period of time.

We trust that these comments have been of assistance.

Yours truly,

Michael Cooke, C.P.A, C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch