Principal Issues: Whether the owner of a qualifying property that operates a hotel, or other similar business like a motel or a bed and breakfast, would be considered to use its qualifying property primarily to earn rental income as described in paragraph (b) of the definition of “qualifying rent expense” in subsection 125.7(1) of the Act, such that the owner would not have any qualifying rent expense and therefore, would be prevented from claiming the CERS for that qualifying property.
Position: Question of fact
Reasons: Generally, any income earned from the use or occupation of a property or a right to use or occupy property is considered to be rental income. Where, in addition to basic services that are customarily supplied with rental of real or immovable property, an entity also provides significant additional services that are integral to the success of its ordinary activities, it is the CRA’s longstanding position that the operation of that entity would be earning income from the services provided instead of earning rental income for the use or occupation of the property.
Mr.David Gagné-Therrien Dedicated Telephone Service Stéphane Thibault, Canada Revenue Agency CPA, CA, LL.M. fisc. 2020-087252
July 16, 2021
Dear Mr. Gagné-Therrien:
Re: CERS – qualifying property primarily used to earn rental income
We are writing in response to your question related to the Canada Emergency Rent Subsidy (“CERS”), as provided in section 125.7 of the Income Tax Act (“the Act”).
More precisely, you asked whether the owner of a qualifying property that operates a hotel, or other similar business like a motel or a bed and breakfast, would be considered to use its qualifying property primarily to earn rental income as described in paragraph (b) of the definition of “qualifying rent expense” in subsection 125.7(1) of the Act, such that the owner would not have any qualifying rent expense and therefore, would be prevented from claiming the CERS for that qualifying property.
Our comments
“Qualifying rent expense”, in respect of a qualifying property for an eligible entity for a qualifying period, is defined in subsection 125.7(1) of the Act to mean the total of certain amounts paid – under a written agreement entered into before October 9, 2020, or pursuant to the renewal (on substantially similar terms) or assignment of a written agreement entered into before October 9, 2020 – in respect of the qualifying period by the eligible entity to a party with which the eligible entity deals at arm’s length.
Paragraph (b) of the definition “qualifying rent expense” applies if an eligible entity is the owner of a qualifying property. In order to have “qualifying rent expense” under paragraph (b) of that definition, the qualifying property must not be used by the eligible entity primarily to earn rental income or, where the qualifying property is used primarily by the eligible entity to earn rental income directly or indirectly from a person or partnership not dealing at arm’s length with the eligible entity, it is not used by that person or partnership primarily to earn rental income.
A “qualifying property” of an eligible entity is defined in subsection 125.7(1) of the Act and generally means real or immovable property in Canada used by the eligible entity in the course of its ordinary activities.
“Rental income” is not defined in the Act. When an expression in not defined in the Act, we generally rely on case law, if any, to interpret its meaning. In Transocean Offshore Limited v. The Queen, 2005 FCA 104, paragraph 45 provides that “rent is defined as an amount paid as compensation for the use or occupation of property, or for the right to use or occupy property.”
Generally, any income earned from the use or occupation of a property or a right to use or occupy property is considered to be rental income. However, where, in addition to basic services that are customarily supplied with rental of real or immovable property, an entity also provides significant additional services that are integral to the success of its ordinary activities, it is the CRA’s longstanding position that the entity would be earning income from the services provided instead of earning rental income from the use or occupation of the property.
Although the term “primarily” is not defined in the Act, “primarily” generally means more than 50% for income tax purposes. Various factors may be considered in determining if a particular property is used primarily to earn rental income, such as the proportion of time the property is used to earn rental income, or the proportion of space, in relation to the total area of the property, that the property is used to earn rental income. With respect to a building, for example, the use of its square footage is generally an accepted factor that is given significant weight in determining the particular use to which a building is put. However, depending on the facts and circumstances of each specific situation, such a determination may require the consideration of other relevant factors.
Whether the owner of qualifying property that operates a hotel, or other similar business like a motel or a bed and breakfast, would be considered to use its qualifying property, for a qualifying period, primarily to earn rental income as described in paragraph (b) of the definition of “qualifying rent expense” in subsection 125.7(1) of the Act, is a question of fact that can only be determined after a review of all of the relevant facts and circumstances that are applicable to the particular situation, including the particular details of any agreement signed between the parties.
We trust our comments will be of assistance.
Yours truly,
Amanda Couvrette, CPA, CA
Acting Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch