In Blecha v The King, 2025 TCC 91, the Tax Court of Canada examined whether a taxpayer was entitled to claim deductions for expenses on a property he owned and said was being rented to his mother. The decision turned on whether the property was a genuine income-producing rental property or a personal-use residence.
Between 2015 and 2017, the taxpayer owned a small home in Wiarton, Ontario. During these years, his mother moved into the home and made regular payments to him. The taxpayer treated the property as a rental property, reported the payments as rental income, and claimed rental losses by deducting expenses related to the property.
The Canada Revenue Agency (CRA) disagreed with this characterization. After a tax audit, the CRA reassessed the taxpayer, disallowing the claimed expenses and reducing his reported rental income to nil. The CRA’s position was that the property was not a bona fide rental property and that the payments did not constitute “income from property” under the Income Tax Act (the “Tax Act”).
The Tax Court sided with the CRA, dismissing the appeal. The Court held that the payments were not income from property and that the taxpayer’s deductions could not be allowed.
The Taxpayer’s Position – Property as a Rental
The taxpayer argued that he acquired and held the property with the intent to earn income, not for personal use. On this basis, he claimed that the payments received from his mother represented rental income and that the expenses incurred—including utilities, repairs, and renovations—were deductible under section 18 of the Tax Act as expenses for the purpose of earning income from property.
The CRA’s Position – No Recognized Source of Income
The CRA argued that the property was not operated as a commercial rental property. Since the payments from the taxpayer’s mother did not originate from a recognized source—business or property—there was no basis for deductions under section 18.
In the alternative, even if the Court found that the property constituted a rental property, the CRA argued that the deductions should be denied or limited under:
- paragraph 18(1)(a) – expenses must be incurred for the purpose of gaining or producing income;
- paragraph 18(1)(h) – personal or living expenses are not deductible;
- section 67 – expenses must be reasonable in the circumstances; and
- Regulation 1100(11) – rental property deductions cannot exceed the amount by which rental income exceeds rental losses.
Legal Framework – The Stewart v R Test
The Court applied the Supreme Court of Canada’s two-part test, established in Stewart v R, 2002 SCC 46, to determine whether the taxpayer’s activities produced income from a source:
- Pursuit of profit or personal endeavour? – This step requires assessing whether the activity is undertaken for a genuine commercial purpose or is essentially personal.
- If not personal, is the source of income business or property? – Only then can deductions be considered under section 18.
The Court examines factors such as:
- The taxpayer’s profit/loss history;
- Relevant training and experience;
- The manner in which the activity is conducted;
- The venture’s potential to earn profit.
The Court’s Analysis – Evidence of Personal Use
The Court found that the taxpayer was not operating a commercial rental venture. Instead, the arrangement was essentially personal in nature. Several key facts supported this finding:
- The taxpayer personally covered many household utilities, including telephone and cable services;
- Significant renovations were made while his mother occupied the home, yet rent was never increased to reflect these improvements;
- After the renovations, the home remained vacant and was never advertised for rent, even during a period when rural rental demand was high due to the COVID-19 pandemic;
- The taxpayer occupied a room in the house for tool storage and weekend stays, despite there being no provision for such use in the lease agreement;
- Following the renovations, the property continued to serve as the taxpayer’s personal residence rather than being offered on the rental market.
The Court emphasized that the taxpayer’s conduct did not resemble that of someone operating a rental property for profit. The lack of advertising, the absence of market-rate rent adjustments, and continued personal use were inconsistent with commercial rental activity.
Conclusion – No Income Source, No Deductions
On the evidence, the Court concluded that the taxpayer’s arrangement with his mother did not produce income from a business or property. Rather, it was a personal arrangement that did not meet the Stewart test. Without a recognized source of income, section 18 barred any deductions for the related expenses.
The appeal was dismissed, confirming the CRA’s reassessment.
Pro Tax Tips – Avoiding Disallowed Rental Deductions
This case highlights the importance of establishing clear evidence that a rental property is operated as a genuine profit-oriented venture. For related-party rental situations, the CRA will look for:
- Market-based lease terms that reflect what an unrelated tenant would pay;
- Evidence of active rental efforts, including advertising and tenant screening;
- Commercial consistency, such as rent adjustments after renovations;
- Separation of personal and rental use, including avoiding personal occupation of the property;
- Documentary evidence, including lease agreements and receipts for all expenses.
Before claiming rental deductions—especially in related-party scenarios—taxpayers should consult with a Canadian tax lawyer to ensure compliance with the Tax Act and to mitigate reassessment risk.
Frequently Asked Questions
What is section 18 of the Income Tax Act?
Section 18 contains the general limitation rules for deductions. It states that no deduction may be claimed unless the expense was incurred to earn income from a business or property. Paragraph 18(1)(h) prohibits personal or living expenses, and paragraph 18(1)(a) prohibits deductions unless incurred for the purpose of gaining or producing income.
What is section 67 of the Income Tax Act?
Section 67 is the “reasonableness” rule for deductions. Even if an expense is otherwise deductible, it will be disallowed to the extent that it is unreasonable in the circumstances. This is determined objectively, based on whether a reasonable businessperson would incur the same expense.
What does Regulation 1100(11) do?
Regulation 1100(11) restricts rental property deductions so they cannot exceed the income from renting the property after accounting for any losses. This prevents taxpayers from claiming excessive deductions on rental properties that do not produce positive rental income.
Disclaimer: This article just provides broad information. It is only up to date 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. 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.