Principal Issues: [TaxInterpretations translation] Do the Taxpayer's leasing activities result in income from a property or an active business?
Position: Question of fact. In this case, it is likely property income because of the nature of the services that are provided.
Reasons: Income Tax Act.
XXXXXXXXXX 2010-038209
March 14, 2011
Dear Sir,
Subject: Active Business Income
This is in response to your letter of September 21, 2010, in which you requested our opinion regarding the above subject.
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 (the "Taxpayer") that has for a number of years been operating XXXXXXXXXX. XXXXXXXXXX consists of the provision of emergency shelter to people affected by property damage caused to their homes by fire, flood or other similar causes. To fulfill that mandate, the Taxpayer leases XXXXXXXXXX units on an annual basis XXXXXXXXXX. The service offered to the victims is a "turnkey" type such that all housing units provided to the victims are fully furnished and include bedding, dishes, television and cable. The Taxpayer is responsible for making a complete cleaning of each housing unit for two victims.
There is no lease between the victims and the Taxpayer but rather a lease agreement signed with the disaster insurance company. On average, the duration of occupation by the victims varies from a few weeks to a few months, depending on the time required to complete the restoration work.
You wish to know if the income that the Taxpayer derives from its activities is property income or business income.
Our Comments
The situation described in your request appears to us to be an actual situation and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, this Directorate does not generally provide a written opinion regarding planned transactions otherwise than by way of advance ruling. Furthermore, when it comes to determining whether a completed transaction has received adequate tax treatment, the responsibility lies with the tax services offices. However, we offer the following general comments. However, our comments may not apply fully to your particular situation.
Subsection 9(1) provides that a taxpayer’s income for a taxation year from a business or property is the taxpayer’s profit from that business or property 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 different tax treatment from income from property.
Interpretation Bulletin IT-434R, Rental of Real Property by Individual, provides criteria that must be examined for determining whether a rental operation carried on by an individual is a source of business income or of property income. In your situation, it will be necessary to evaluate the services offered by the Taxpayer to determine whether the taxpayer's rental activities generate income from a property or a business.
“…[T]he 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. 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.” (Our emphasis)
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. Similarly, where a building is rented en bloc with the landlord providing only maintenance of the building in addition to heating and air conditioning, the rental clearly is one of property.
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. For example, in the case of an apartment block, it is the extent to which basic and additional services are supplied to tenants that will determine whether the activity generates income from a business. These services may include, among other things, 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, and a mail and parcel pick-up and delivery service.
In the situation you presented to us, the Taxpayer offers fully furnished housing units that include bedding, dishes and cable services. The Taxpayer is responsible for effecting a complete cleaning of each housing unit for two victims.
Based on the information you provided, we are of the view that income generated by the Taxpayer's activities appears to be more like income from property. Indeed, the services offered by the Taxpayer do not seem as exhaustive as those provided by a taxpayer operating a motel or a hotel, the latter activities representing activities that give rise to income from a business.
These comments do not constitute advance income tax rulings and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding on the Canada Customs and Revenue Agency in a particular case.
We hope that the above comments will be of assistance and will answer your questions.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.