Blecha v the King – What Expenses Can Owners Deduct from Rental Properties That Produce No Income?

Introduction: CRA’s Reassessments Related to Deductibility of Expenses for a Rental Property  

Blecha v The King, 2025 TCC 91 involved a taxpayer who owned a small house in Wiarton, Ontario and claimed rental losses. In 2015, 2016, and 2017, the Appellant’s mother moved into the home and made payments for the home. The Appellant asserted that his home was a rental property and his mother was a tenant. From his perspective, this entitled him to deduct expenses related to the rental property.

CRA did not accept that the property was a rental property. The taxpayer was reassessed, and the expenses that were deducted in relation to the rental property were disallowed. Further, his rental income for the years in question was reduced to nil.

The Tax Court examined the evidence and circumstances and found that the income that he received was not income from property. As such, the deductions were not allowed, and the appeal was dismissed.

The Appellant’s Position: The Property Is a Rental Property, Which Entitled Him to Deductions

The Appellant claimed the deductions on his property because he contended that the property was a rental property during the relevant years. He argued that he owned the property in the pursuit of profit and not a personal endeavour. This would entitle him to make deductions on the income he received from the property.

CRA’s Position: The Appellant is Not Entitled to Deduct Any Amounts Because He Did Not Earn Income From Property or Business

The CRA’s position was premised on the assumption that the property was not a rental property. Since the property in question was not a rental property, the income that he earned had no source under section 3 of the Income Tax Act (“Tax Act”). As such, no deductions should be allowed.

In the alternative, if the Tax Court found that the property was a rental property, the CRA argued that the taxpayer’s deductions should be limited under section 18(1)(h), 18(1)(a), 67 of the Tax Act and subsection 1100(11) of the Income Tax Regulations (“Regulations”).

Section 18 of the Tax Act prohibits a taxpayer from deducting certain items that are listed in the section. Specifically, paragraph (h) does not allow deductions for personal or living expenses. Paragraph (a) does not allow deductions for an outlay or expense unless it was made for the purpose of gaining or producing income from business or property.

The general rule under section 67 is that a deduction for an outlay or expense cannot be made unless it was reasonable in the circumstances. Regulation 1100(11) provides that a deduction in respect of rental property cannot exceed the amount by which the income from renting the property exceeds the losses from renting the property.

Legal Test to Determine Whether There is Income From Property: Stewart v R

The first pertinent issue is whether the Appellant was earning income from property. The test to determine whether the taxpayer had a source of income from property was set out in the Supreme Court of Canada’s case, Stewart v R 2002 TC 6969. The test relates to the pursuit of profit and involves answering two questions:

1. Is the activity of the taxpayer undertaken in pursuit of profit, or is it a personal endeavour?
2. If it is not a personal endeavour, is the source of income a business or property?

The first question requires the Court to distinguish between people who engage in commercial activities or hobbies.

The Court stated that the subjective intent of the Appellant is relevant in determining whether the activities were undertaken in the pursuit of profit. If there is an intent to profit, that is an indication that the income will be either business income or income from property.

Further, the Court will look to see if there is evidence of businesslike behaviour to support the allegation that the taxpayer had the subjective intention to earn a profit. Specifically, the Court will examine:

• the profit and loss record in recent years;
• the taxpayer’s experience and training;
• the taxpayer’s actual conduct pursuing the venture;
• the capability of the venture to show profit.

If the taxpayer’s activities are not personal in nature, then the Court is left with answering whether the source of income is business or property.

To make deductions under section 18, there is a requirement that the taxpayer earn income from a business or property. This means that there first needs to be income from a source, and that source must be business or property.

Application: The Court Considers Documentary Evidence and The Taxpayer’s Conduct to Determine Whether The Property Was a Rental Property

Ultimately, in this case, the Tax Court did not agree that the Appellant was engaged in commercial-like activity. Thus, there was no source of income, and, consequently, he was not entitled to claim deductions.

The Tax Court considered various pieces of documentary evidence to come to this conclusion. First, the Tax Court took issue with the fact that much of the living expenses were borne by the Appellant. Specifically, personal utilities, such as telephone and cable, were paid by the Appellant.

Second, the considerable improvements made to the home in the period that the Appellant’s mother became a “tenant” never resulted in a rent increase. Third, even after the home became vacant in 2021 and after the renovations were complete, no other tenant occupied the property, even at a point in time during the COVID-19 pandemic when people were seeking to live in remote areas.

One of the objective factors that the court emphasized was the Appellant’s conduct in pursuing the venture. For example, the Tax Court was suspicious of how the Appellant never advertised the property for rent. The actual way he conducted himself during the period that his mother was a tenant was also suspicious, as he occupied a room even though the lease never allowed him to occupy a room to store tools for the renovation or for him to stay during the weekend.

The house also remained his personal residence after the renovations were concluded. These facts led to the conclusion that he was essentially renovating his personal property while presenting to the CRA that he was renting his property.

Pro Tax Tip: The Use of Deductions Under Section 18 of the Tax Act Requires Income From Business or Property

The taxpayer in this case found himself in a situation where he thought it was possible to take advantage of specific deductions based on the characterization of his income. The issue with his plan is that the evidence and facts related to his situation did not adequately show that he was producing income from a property, which resulted in the CRA denying his claim to certain deductions.

It is important to know how your income will be characterized to understand your entitlement to deductions for income earned from property. Engage with a top Canadian tax lawyer if you are unsure on how your income will or should be characterized in relation to rental income you may receive.

FAQ

What is section 18, and what are some examples of deductions that can be made?

Section 18 of the Tax Act provides a taxpayer with the ability to claim a deduction related to income that is earned from a business or property. In particular, this provision states that no deductions can be made, and the paragraphs under subsection 18(1) list all the deductions that cannot be made.

Some paragraphs will have exceptions. For example, paragraph 18(1)(h) states that no deductions shall be made in respect of personal or living expenses of the taxpayer unless that expense is a travel expense incurred by the taxpayer while away from home in the course of carrying on the taxpayer’s business. This paragraph does not allow deductions for personal or living expenses, but allows those expenses if they are incurred when a taxpayer is away from home conducting business.

What is Section 67 of the Tax Act?

Section 67 of the Tax Act is a general limitation on expenses. This provision provides that no deductions will be permitted unless the outlay or expense related to the deduction was reasonable in the circumstances.

Reasonableness of an expense is determined on a case-by-case basis. Essentially, the question being asked is whether a reasonable businessman would have contracted to pay that amount, which is the expense. Unreasonable expenses should not be denied outright, but a reasonable portion of the expense should be allowed.

Disclaimer: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.