5 December 1997 External T.I. 9725365 - RENTAL OPERATION - WHETHER INCOME FROM BUSINESS

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether income from a 100 room hotel and 12,000 foot commercial area would be considered business income or rental income.

Position:

It is a question of fact whether the income would be business income or rental income.

Reasons:

Insufficient information regarding the number and kinds of services provided.

J. Gibbons
XXXXXXXXXX 5-972536

Attention: XXXXXXXXXX

December 5, 1997

Dear XXXXXXXXXX:

We are replying to your letter of July 26, 1997, addressed to the XXXXXXXXXX Taxation Centre, which we received on September 18, 1997. You inquire whether income generated from a 100 room hotel and 12,000 square foot commercial area, held by a limited partnership, would be considered business income or rental income. We have assumed that the commercial area will be leased or rented for commercial use.

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 matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

It is a question of fact whether a rental operation carried on by an individual is a source of business income or of property income. Interpretation Bulletin IT-434R, a copy of which is enclosed, discusses this issue in detail. As indicated in paragraph 4 of the Bulletin, the renting of real property will be regarded as a business operation only when the landlord supplies or makes available to tenants services of one kind or another, to such an extent that the rental operation has gone beyond the mere rental of real property. Accordingly, where the nature of a particular rental operation must be determined, it is the number and kinds of services supplied that will have to be ascertained. In this respect, we refer you to paragraphs 5 and 6 of the Bulletin. However, as indicated in paragraph 7 of the Bulletin, the operator of a rooming or lodging house, hotel or motel would normally be considered to be carrying on a business where, in addition to the basic services that relate to the operation and maintenance of the property, extra services such as the supply of cleaning and maid services, linens, washroom supplies, dining facilities, etc. are provided for the convenience and comfort of the guests. You should note, also, that, as indicated in paragraph 8 of the Bulletin, the fact that a rental operation is carried on by what appears, or purports, to be a partnership does not, in itself, justify an assumption that the operation therefore must be a business. Where, however, it can be determined that a rental operation is a business, the fact that the relationship of its owners appears, or is claimed, to be that of partners rather than merely co-owners tends to confirm the other indications that it is indeed a business. However, even if a business is considered to exist, the property used therein may be considered to be a “rental property” for the purposes of the capital cost allowance ("CCA") restriction in subsection 1100(11) of the Income Tax Regulations (the “Regulations”). Subsection 1100(11) of the Regulations restricts the amount of CCA that may be claimed on rental properties of a taxpayer, or of a partnership of which the taxpayer is a member, to the amount by which the total income from rental properties exceeds the total losses from rental properties. Subsection 1100(14) of the Regulations provides, inter alia, that rental property of a taxpayer or partnership in a particular year means a building owned by a taxpayer or partnership if the property was used in the particular year by the taxpayer or the partnership principally for the purpose of gaining or producing gross revenue that is rent. Generally, if a property is used more than 50 percent of the time for producing gross rental revenue or more than 50 percent of its space is used for producing gross rental revenue, the property will be considered to be used principally for this purpose. However, according to subsection 1100(12) of the Regulations, the CCA restriction in subsection 1100(11) of the Regulations does not apply where each member of the partnership is either a life insurance corporation or a corporation whose principal business is the leasing, rental, development or sale, or any combination thereof, of real property owned by it.

Subject to subsection 1100(14.2) of the Regulations, subsection 1100(14.1) of the Regulations deems gross revenue derived in the taxation year from the right of a person or partnership, other than the owner of the property, to use or occupy the property or part thereof, and from services offered to a person or partnership that are ancillary to the use or occupation by the person or the partnership of the property or the part thereof, to be rent derived in that year from that property. Thus, unless subsection 1100(14.2) of the Regulations applies, gross revenue that is rent will include revenue derived from a property such as a hotel, motel, or nursing home operation, where it is established that such revenue is ancillary to the use or occupation of the property.

Subsection 1100(14.2) of the Regulations provides, inter alia, that subsection 1100(14.1) of the Regulations does not apply to property owned by a partnership, where the property is used in a business carried on by the partnership, if at least 2/3 of the income or loss of the partnership is included in the determination of the income of the members of the partnership who are either corporations or individuals that are personally active in the business of the partnership on a continuous basis throughout that portion of the year during which the business is ordinarily carried on. We refer you to the enclosed Interpretation Bulletin IT-195R4 for a discussion of rental properties and the CCA restriction.

In addition, you should note that, if a taxpayer is a limited partner as defined in subsection 96(2.4) of the Income Tax Act (the "Act"), the rules in subsection 96(2.1) of the Act can prevent the taxpayer's share of the partnership's loss from being fully deductible in the loss year. By virtue of subsection 96(2.1) of the Act, the portion of a limited partner's share of partnership losses from business (other than a farming business) or property that can be deducted in the loss year is based on the limited partner's "at-risk amount" (which is determined under subsection 96(2.2) of the Act) at the end of the fiscal period of the partnership that ends in the year, less certain amounts specified in subsection 96(2.1) of the Act.

Given the limited information provided in your letter, we cannot comment further on whether income from the proposed 100 room hotel and 12,000 square foot commercial area would be considered business income or property income and whether the property would be considered rental property.

We trust that these comments will be of assistance.

Yours truly,

C. Chouinard
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

Encl.

.../cont’d

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