ARCHIVED - Rental of Real Property by Individual
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DATE: April 30, 1982
SUBJECT: INCOME TAX ACT
Rental of Real Property by Individual
REFERENCE: Section 3 (also sections 9 and 216, and subsections 2(3), 74(1), 74(5), 75(1), 115(1), 120(1) and 120(2), and paragraphs 63(3)(b), 120(4)(a) and 146(1)(c), and Part XIII, and subsections 1100(3) and 2602(1) and Part XXVI of the Income Tax Regulations)
This bulletin cancels and replaces Interpretation Bulletin IT-434 dated July 23, 1979 and Special Release dated September 14, 1979. Current revisions are designated by vertical lines.
1. Subsection 9(1) of the Act prescribes that a taxpayer's income for a taxation year from a business or property is the profit therefrom for the year. Although that subsection does not differentiate between these two sources of income, there are other areas in the Act where a business is treated as a source of income different from property and where, as a result, income from a business is subject to a different tax treatment than income from property. The criteria for determining whether a rental operation carried on by an individual is a source of business income or of property income are discussed in 2 to 8 below and the income tax consequences resulting from the classification of rental income as business income or as property income are discussed in 9 to 19 below.
Nature of Rental Operation
2. The delegation by the owner of real property of its management and supervision to an agent will not, in itself, alter the nature of the rental income. If the renting of the property would have constituted a business when carried on by the owner himself, it will still be a business when undertaken by an agent on the owner's behalf.
3. Where the renting of real property to others by an individual is incidental to, or is part of the fabric of, his business, the renting will be regarded as a business operation and any rental income or loss will form part of the individual's business income or loss; examples are the renting of temporarily unused space in the taxpayer's factory or warehouse and the renting of land held for future expansion.
4. Where it is not part of, or incidental to, an existing business, the renting of real property by an individual is not, in itself, indicative of a business operation. It 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. The size or number of properties being rented, the extent to which their management or supervision occupies the owner's time, whether the accommodation is rented bare or provided with appliances or even partly or completely furnished - none of these are factors to be taken into account in determining if the operation is a business.
5. Where a building is rented en bloc (e.g., an office building), with the landlord providing (in addition, of course, to the accommodation) only maintenance of the building as such and perhaps heat and air conditioning, the rental clearly is one of property and does not constitute the carrying on of a business. The same situation is considered to exist where a building is rented piecemeal (e.g. an apartment block) and the tenants are provided with only those basic services which, by custom, have come to be regarded as an inherent part of that kind of property rental, e.g.: heat, water, elevator service, telephone in lobby, indoor or outdoor parking spaces, laundry room with equipment for tenants, maintenance of the building itself (including janitor and window washing service, repainting of apartments), maintenance of adjacent areas (including snow and garbage removal service) and maintenance of any appliances and furnishings provided in the rented accommodation.
6. If, however, services additional to those mentioned above are provided, it is possible that the landlord may be carrying on a business rather than merely renting real property, and the more services he provides the more it becomes arguable that this is so. At this point, both the basic services and the number and kinds of additional services provided for, or made available to, tenants must be considered. For example, the landlord of an office building may not only supply the services basic to its operation but, in addition, office cleaning and protective services in respect of the rented accommodation; these latter could be the decisive factors in a determination that a business is being carried on. In the case of an apartment block, it is the extent to which basic and additional services are supplied to tenants that will determine if its operation is a business. These latter may include, but are not necessarily limited to, the supplying of meals and drinks to tenants, a restaurant or lounge on the premises, cleaning service for the rented accommodation (as distinct from the building itself), maid service for tenants, a constant supply of fresh linens, and washroom supplies, commissionaire or other protective service, a mail and parcel pick-up and delivery service, etc.
7. The operation of a rooming or lodging house that does no more than rent rooms is likely to be a rental business because of the supplying of cleaning and maid services, linens, washroom supplies and so on. The operation of a trailer court or campground where all services are provided, e.g., laundromat, cafeteria, swimming pool, showers, playgrounds, etc. and the operation of a hotel, motel or boarding house of any size would be a business, but not a rental business due to the magnitude of services provided.
8. Where two or more individuals participate in a rental operation, the question of whether it is a business still must be determined according to the principles outlined above. 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, the application of those principles indicates 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. (See the comments in IT-90 "What is a Partnership?".)
Nature of Rental Income - Income Tax Consequences
9. Certain situations where it will be significant to determine whether the income from the rental of real property by an individual constitutes business or property income are outlined in the paragraphs that follow.
Attribution of Income from Property Transferred
10. Subsections 74(1) and 75(1) provide that any income or loss arising from property transferred either to the transferor's spouse or to a minor is deemed to be income or a loss of the transferor. Effective December 12, 1979, subsections 74(7) and (8) provide that subsection 74(1) will not apply to a transfer of property to a spouse who is living apart from the transferor and is separated pursuant to a decree, order or judgement of a competent tribunal or a written separation agreement. Where the separation is pursuant to a written separation agreement, the separation must be of at least twelve months duration commencing from the date on which the written separation agreement was entered into, but where the spouses cease to live apart from the taxpayer within those twelve months subsections 74(1) and (2) apply retroactively to the commencement of the twelve month period. Subject to this exception, subsections 74(1) and 75(1) can be applied only when transferred property is productive of income from "property", such as rentals. Accordingly, subsections 74(1) and 75(1) do not apply to attribute income from a business to the transferor even if the business operates with some or all of the property obtained originally from the transferor. Neither will these subsections apply where a rental operation that itself constitutes a business has been transferred to a spouse or minor. (For more detailed discussion on subsections 74(1) and 75(1) see IT-258R, "Transfer of Property to a Spouse" and IT-260R, "Transfer of Property to a Minor").
Husband and Wife Partnership
11. For fiscal periods ended prior to December 12, 1979, where spouses were partners in a rental business, the Minister may, by virtue of subsection 74(5), deem the entire income from the rental business to be income of one spouse. Subsection 74(5) will be applied where one of the spouses neither actively participates in, nor invests his or her own property in, the business of the partnership. Subsection 74(5) has been repealed applicable with respect to fiscal periods ending after December 11, 1979 but section 103 will continue to be applicable.
"Earned Income" (Paragraph 146(1)(c))
12. Rental income from real property, whether business or property income, constitutes "earned income" for purposes of calculating the deduction allowable for registered retirement savings plan premiums paid. On the other hand, rental income from chattels or any other class of property would constitute "earned income" for this purpose only if it can be regarded as income from carrying on a business either alone or as a partner actively engaged in the business (see 13 below) since the phrase "real property" in the definition of "earned income" means land and building only. However, where rentals from chattels or any class of property included in, or associated with, real property is received in one amount with rental from real property (as, for example, when a house is rented furnished), the Department takes the position that, as a general rule, no breakdown of such amount need be made and the total amount of rent may be dealt with as income from real property.
"Earned Income" (Paragraph 63(3)(b))
13. For purposes of calculating the child care expense deductions, the "earned income" of an individual, as defined in paragraph 63(3)(b), must be taken into account. This definition includes "his incomes from all businesses carried on either alone or as a partner actively engaged in the business" but does not include income from property. Thus, rental income can be included in the calculation of "earned income" only where it constitutes income from a business that is carried on either as a sole proprietorship or, in the case of a partnership, by a partner actively engaged in the business. For purposes of this paragraph and 12 above, to be considered "actively engaged in the business" of a partnership, a partner would normally be expected to contribute time, labour and attention to that business to a sufficient extent that such contributions would be a determinant in the successful operation of the business.
Allocation of Income from Rental Operations to a Particular Province
14. Where an individual who is a resident of Canada earns or receives rental income from real property in a province or territory, all rental income, wherever earned or received, is deemed to be income earned in the province or territory in which the individual resides on the last day of the taxation year, if the rental income constitutes income from property. On the other hand, if the rental income constitutes business income, the rental income must be allocated to the permanent establishment in the province through which it was earned in accordance with Part XXVI of the Regulations.
Rentals Received by Non-Resident from Real Property Situated in Canada
15. Where the renting of real property by a non-resident individual is a business carried on in Canada, the taxable income will be computed pursuant to subsection 115(1). The individual will be taxable under Part I by virtue of subsection 2(3) and, in addition, pay provincial income tax on the rental income earned in a province. In calculating taxable income, the individual will be eligible for Part I deductions (including Division C deductions to the extent set out in IT-171 "Taxation of Non-Residents - Determination of Taxable Income Earned in Canada").
16. Where the non-resident's rental operation is found not to be a business or part of a business, the income therefrom is not computed under subsection 115(1). Instead, the individual will be subject to Part XIII tax on the gross amount of rent received. Alternatively, the individual may elect under section 216 to file an income tax return and pay tax under Part I on that income, as though he were a person resident in Canada, but without being allowed any deductions from that income for the purpose of computing taxable income (i.e. Division C deductions). (See IT-393 "Election re Tax on Rents and Timber Royalties - Non-Residents"). Further if the non-business rental income is the only income that an individual who was non-resident throughout the year would report in an income tax return under subsection 216(1), then there is no "income earned in the year in a province" within paragraph 120(4)(a), since subsection 2602(1) of the Regulations in effect provides that the income earned in a province by an individual who did not reside in Canada at any time in the taxation year does not include income from property. It follows that the individual is liable for the additional tax under subsection 120(1) upon the rental income subject to the election and that he will not be required to pay provincial income tax on the rental income earned in an agreeing province.
Computation of Net Rental Income
17. The characterization of rental income will, in some instances, also affect the deductions which may be claimed in computing net rental income. For instance, an amount paid for a utility service connection is deductible as an expense only in computing income from a business. In other cases, the characterization will affect the quantum of an otherwise deductible amount, as set out below.
Capital Cost Allowance Claims - Rental Property versus Business Property
18. Whether the renting of real property by an individual is a business or not, the depreciable property (ie. a building other than a building of Class 31 or 32) is considered a "rental property" for purposes of capital cost allowance. The amount of capital cost allowance the individual may claim is restricted by subsection 1100(11) of the Regulations as set out in IT-195R2 "Rental Property - Capital Cost Allowance Restrictions".
Capital Cost Allowance Claims - Taxation Year of Lessor
19. Where the renting of real property by an individual is a business, the taxation year in respect of the real property-means, for capital cost allowance purposes, the fiscal period of the business ending in the calendar year. On the other hand, where the rental operation is not a business, the taxation year for which any capital cost allowance in respect of the real property may be claimed is always the calendar year. The distinction between business property and non-business property is of importance in the application of Regulation 1100(3), as set out in IT-172R "Capital Cost Allowance - Taxation Year of Individuals".
Travel Expense Claims
20. The extent to which travel expenses are deductible when the rental operation is a business and when it is not is commented on in paragraphs 10 to 12 of IT-180 "Automobile Expenses Claimed by Self-Employed Individuals".
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