Principal Issues: [TaxInterpretations translation] Does a corporation that carries on a business in Quebec that leases six trailers to contractors to house their employees generate income from an active business?
Position: Question of fact. But in this case, given the extensive services provided to the lessees, we are of the view that the income generated by the corporation is income from an active business.
Reasons: Income Tax Act
XXXXXXXXXX 2010-038774
May 24, 2011
Dear Madam,
Subject: Income from an active business
This is in response to your letter of November 9, 2010 in which you requested our opinion regarding the nature of a corporation's income from renting trailers for temporary housing for workers.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
In particular, you described the situation of a corporation that carries on a business in Quebec that leases six trailers to contractors in order for them to lodge their employees. The corporation rents trailers without a lease when the rental is for a short term and with a lease when the rental is for six to twelve months. Each trailer contains four or five rooms.
The trailers are rented furnished including dishes, bedding and a laundry room. Trailer rental also includes various services including the following:
• Electricity;
• Phone;
• Cable;
• Snow removal for parking and stairs;
• Grounds maintenance;
• Supply and washing of bedding;
• Supply of cleaning products;
• Supply of certain products for daily use, including light bulbs;
• Toilet paper and paper towels (only for short term rentals);
• Other maintenance.
Housekeeping services are also provided two to three times a week for each trailer. These services include washing floors, washing blinds, washing the stove and washing the refrigerator. When a person moves out from a room, the company carries out the complete cleaning of the room.
You confirmed that fewer than six employees work for the corporation during a year.
The corporation also provides management services to trailer owners. It provides them with the same services as those stated above.
Thus, you wish to know if the income the corporation earns from the rental of trailers and management services is income from an active business pursuant to subsection 125(7).
Our Comments
It appears to us that the situation described in your letter and hereinafter summarized could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be helpful to you.
Subsection 125(7) provides the following definition of an active business carried on by a corporation:
…[A]ny business carried on by the corporation other than a specified investment business or a personal services business and includes an adventure or concern in the nature of trade.
A specified investment business is defined as follows:
…[A] business (other than a business carried on by a credit union or a business of leasing property other than real property) the principal purpose of which is to derive income (including interest, dividends, rents and royalties) from property but, except where the corporation was a prescribed labour-sponsored venture capital corporation at any time in the year, does not include a business carried on by the corporation in the year where
(a) the corporation employs in the business throughout the year more than 5 full-time employees, or
(b) any other corporation associated with the corporation provides, in the course of carrying on an active business, managerial, administrative, financial, maintenance or other similar services to the corporation in the year and the corporation could reasonably be expected to require more than 5 full-time employees if those services had not been provided;
As a preliminary matter, we note that a specified investment business excludes a business that leases property other than real property. For the purposes of this section, we have assumed that the trailers rented by the corporation are real property.
In this case, it is therefore necessary to determine whether the corporation carries on a business the principal purpose of which is to derive income from property, namely rents, or if the leasing of the trailers gives rise to business income. For that purpose, Interpretation Bulletin IT-434R, Rental of Real Property by an Individual, states the following:
… 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.
Thus, it is the extent to which basic services and additional services are provided to tenants that will determine whether the activity generates income from a business. Although we remind you that this determination is one of fact, we believe that the income generated by the trailer rental corporation is active business income. Our conclusion is the same regarding the income that the corporation derives from its management services.
We hope that these comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate