Principal Issues: [TaxInterpretations translation] If subsection 75(2) in the Act applies in respect of a rental property transferred by an individual to a trust and the individual has other rental properties, how does the rule in subsection 1100(11) of the Regulations apply when calculating the capital cost allowance allowed for the trust and the capital cost allowance for the individual's rental properties?
Position: If the property transferred by the individual to the trust is the only rental property owned by the trust directly or through a partnership, the trust's capital cost allowance will be limited to the rental income from that property.
When computing capital cost allowance in respect of rental property owned by the individual, the individual will not take into account rental income from the property that has been transferred to the trust, even if it has been attributed to the trust under subsection 75(2).
Reasons: Subsection 1100(11) of the Regulations provides that the income or loss that a taxpayer must take into account in computing the capital cost allowance restriction is the income or loss from property owned directly or through a partnership. The trust does not own the rental property owned by the individual personally. Similarly, the individual does not own the property that was transferred to the trust.
XXXXXXXXXX 2007-023995
Sylvie Labarre, CA
February 6, 2008
Dear Madam,
Purpose: Rental property held by a trust
This is in response to your letter of June 6, 2007 requesting our opinion on the application of subsection 1100(11) of the Income Tax Regulations (the "Regulations") in the following hypothetical situation.
An individual owns several rental properties that cost more than $50,000. As a result, each building is in a separate class by virtue of subsection 1101(1ac) of the Regulations.
The individual transfers one of the rental properties to a trust of which he is the settlor, trustee and sole beneficiary. The income from that property is not business income. Consequently, the income or loss from the rental property will be deemed to be income or loss of the individual pursuant to subsection 75(2) of the Income Tax Act (the "Act").
You wish to know whether the income deemed to be received by the individual will be the rental revenue less expenses including capital cost allowance, if any, and whether the income attributed pursuant to subsection 75(2) will retain its nature as net rental income. You also wish to know whether, for purposes of the capital cost allowance restriction in subsection 1100(11) of the Regulations, the trust will take into account in its computation, the net rental income from the individual's other properties or whether the individual will take into account, in the individual’s own computation, the net rental income deemed to be received under subsection 75(2).
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
The individual is deemed to receive income from property by virtue of subsection 75(2) in an amount equal to the excess of the revenue from the rental property transferred to the trust over the deductible expenses related thereto, including allowable capital cost allowance, if any. The individual will be able to report this property income as net rental income on the individual’s income tax return.
Subsection 1100(11) of the Regulations limits the amount of capital cost allowance that can be claimed for a rental property owned by a taxpayer. Subsection 1100(11) of the Regulations applies where a taxpayer owns property of a prescribed class for capital cost allowance purposes and that class includes rental property owned by the taxpayer. A taxpayer may claim capital cost allowance that would otherwise be deductible in computing income for a taxation year in respect of those classes of property owned by the taxpayer to the extent that the aggregate amount does not exceed
(a) the taxpayer's income for the year from the renting or leasing a property owned by the taxpayer (computed before any capital cost allowance claims that would otherwise be deductible under paragraph 20(1)(a))
and
(b) the taxpayer's share of the income of a partnership for the year from renting or leasing a rental property of the partnership
over
(c) the taxpayer's loss from the renting or leasing a property owned by the taxpayer (computed before any capital cost allowance claims that would otherwise be deductible under paragraph 20(1)(a))
and
(d) the taxpayer's share of the loss of a partnership for the year from renting or leasing a rental property of the partnership.
As you can see, the income or loss that the taxpayer must take into account in computing the restriction is income or loss from property that the taxpayer owns directly or through a partnership.
In this situation, the trust does not own rental property owned by the individual personally. Consequently, if the property transferred by the individual to the trust is the only rental property owned directly or through a partnership by the trust, its capital cost allowance will be limited to the rental income from that property.
Similarly, the individual does not own the property that was transferred to the trust. Consequently, when computing capital cost allowance on rental property owned by the individual, the individual will not take into account the rental income from the property that was transferred to the trust, even if it was attributed to the individual by virtue of subsection 75(2).
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.