Principal Issues: Whether a corporation is required to file an information return pursuant to subsection 238(2) of the Income Tax Regulations where the corporation pays amounts to subcontractors in respect of the operation of heavy equipment.
Position: Question of Fact
Reasons: It is a question of fact which depends on whether a corporation carries on construction activities as defined in Regulation 238(1) and whether the corporation's business income is primarily derived from construction activity.
XXXXXXXXXX 2011-042528 Gillian Godson 613-957-8981
March 6, 2012
Dear XXXXXXXXXX :
Re: Requirement to File T5018
We are writing in reply to your letter of October 24, 2011, concerning whether a corporation is required to file an information return (form T5018) pursuant to subsection 238(2) of the Income Tax Regulations (the "Regulations").
In your inquiry, and in our telephone conversation of February 21, 2012 (XXXXXXXXXX /Godson), you have described a situation involving a corporation that is primarily in the business of renting heavy equipment (such as trucks with overhead cranes) with an operator to perform services for other corporations primarily involved in construction activities. However, at times the corporation subcontracts the operation of the heavy equipment to another operator. In particular, you have inquired whether a corporation in the situation described would be required to file the T5018 information return with respect to the payments made to the subcontractor.
Our Comments
Subsection 238(2) of the Regulations provides that every individual, partnership or corporation, whose business income is derived primarily (i.e., more than 50%) from construction, must report amounts that it pays or credits in a reporting period in respect of goods or services rendered on its behalf in the course of construction activities. Accordingly, a corporation whose primary business activity is construction and who makes payments to subcontractors for construction goods and services will be required to file a T5018 information return.
Pursuant to subsection 238(1), "construction activities" includes the erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of all or any part of a building, structure, surface or sub-surface construction, or a similar property. However, it is a question of fact whether a particular activity is a construction activity and whether a corporation's business income for a reporting period is derived primarily from such activity.
Where an individual, partnership or corporation (in your example, a corporation) provides heavy equipment with an operator for use primarily in construction activities, it is not merely renting the equipment to its client. As described on our web page "Examples of Construction Activities" (www.cra-arc.gc.ca/tx/bsnss/cntrct/frmt5018/pyr/ctvty-eng.html), it is our view that this is a construction activity. Specifically, we are of the view that the service of providing heavy equipment with an operator is a construction activity regardless of whether the operator is an employee of the corporation or a subcontractor. Accordingly, as described in our fact sheet "Contract Payment Reporting System (CPRS)" (www.cra-arc.gc.ca/nwsrm/fctshts/1999/m12/cnfct-eng.html), the corporation must file a T5018 for all payments to subcontractors for construction services. It is our view that this would include payments to subcontractors to operate the equipment in the situation described in your inquiry.
Please note that the failure to file an information return, when and in the manner required by the Income Tax Act or the Regulations, could result in the application of penalties.
We trust that these comments will be of assistance.
Yours truly,
Terry Young, CA
for the Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch