Principal Issues: [TaxInterpretations translation] How would the CRA treat an agreement between co-owners of a triplex to divide the rental revenue?
Position: Question of fact.
Reasons: Tax law depends on the private tax applicable in a particular province. Thus, to the extent that the agreement is valid under the Civil Code of Quebec, the CRA should review the specific provisions to determine the tax consequences applicable to Taxpayers that arise from the application of the Agreement.
May 18, 2011
Montreal Tax Services Office Income Tax Rulings Directorate Tax Technical Interpretation Services Business and Partnerships Division Attention: Yan Joannis, CMA James Gibbons
2010-038039
Agreement to divide the revenue from an immovable
This memorandum is in response to your email dated September 10, 2010 in which you requested our comments regarding an Agreement for exclusive use entered into between the co-owners (“Taxpayers”) of an immovable.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
FACTS
- The Taxpayers were the heirs in equal shares of a triplex (the ”Immovable”) of their deceased mother who devised it to them in her will.
- Currently, the Taxpayers manage the Building as co-executors of their mother's estate and are not yet holders of the title to the Immovable.
- One of the taxpayers resides in one of the housing units in the immovable.
- The other Taxpayer does not reside in the Immovable but has placed the Taxpayer’s daughter in another unit in the Immovable.
Based on the facts described above, the Taxpayers wish to know if an exclusive use agreement (the "Agreement") between them would be recognized by the Canada Revenue Agency. The Agreement would provide as follows:
(i) the Taxpayer residing in the building would reside there for free; and
(ii) the revenue generated by the unit in which the other Taxpayer's daughter lives would be received entirely by that Taxpayer and only appear in that taxpayer’s tax return.
Are there any obstacles to the application of such an Agreement? This Agreement would be entered into after the Taxpayers acquired the title to the property as undivided owners.
OUR ANALYSIS
Tax law depends on the private law applicable in a particular province. Thus, to the extent that the Agreement is valid under the Civil Code of Québec, the Canada Revenue Agency should examine the specific provisions of the Agreement to determine the tax consequences applicable to Taxpayers arising from the application of the Agreement. As part of that analysis, we have assumed that none of the Taxpayers would receive any benefit because of the Agreement.
XXXXXXXXXX. Generally, a taxpayer may, for the purposes of the principal residence exemption, designate a housing unit that is, for the year in which the designation is made, "ordinarily inhabited" during the year by the taxpayer, his or her spouse or common-law partner or former spouse or common-law partner or by a child of the taxpayer. For each taxation year after 1981, a taxpayer's family unit - as defined in paragraph 6 of Interpretation Bulletin IT-120R6, Principal Residence (the "Bulletin") - cannot designate more than one property as a principal residence.
Another question is whether the rental income that is collected by one of the Taxpayers is a source of income for the purposes of section 9 of the Act and, therefore, must be included in computing the taxpayer’s income. While this is a question that we cannot answer, we reiterate the two-part approach that was developed by the Supreme Court of Canada ("SCC"):
1. Is the taxpayer's activity undertaken in pursuit of profit, or is it a personal endeavour?
2. If it is not a personal endeavour, is the source of the income a business or property?
As stated by the SCC, the first component must be analyzed only if the activity in question involves a personal or recreational aspect. In fact, where an activity is clearly commercial, it is not necessary to analyze the taxpayer's decisions since, by definition, there is a source of income whose purpose is the pursuit of profit. In other words, the purpose of this component is to analyze the commercial nature of the taxpayer's business. On the other hand, if the taxpayer's activity contains personal or recreational elements (for example, in a case like this where a parent rents a capital asset to the parent’s child), it must be determined whether the taxpayer intends to make a profit. In this respect, it is a question of whether the activity is operated in a sufficiently commercial manner.
Finally, it should be noted that the change of use rules could apply to your situation. However, since we do not have enough information to comment on this, we invite you to consult the Bulletin cited above by visiting the Canada Revenue Agency's Web site at http: // www. .cra-arc.gc.ca / E / pub / tp / it120r6 / READ-ME.html.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, you may give them a severed copy as it appears in the Canada Revenue Agency's electronic library. The taxpayer may also request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (819) 994-2898. A copy will be sent to you for delivery to the taxpayer.
We hope that these comments are of assistance.
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate