Principal Issues: Whether a trust owning residential and commercial buildings for rental is carrying on a business if it leaves the management to an external manager.
Position: Question of fact.
Reasons: IT-454R.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2021
APFF CONFERENCE 2021
Question 3
Carrying on of a business by a trust
A personal trust resident in Canada (the “Trust”) owns residential and commercial real estate in Canada. The properties were all acquired for the purpose of holding them for the long term and generating rental income. The leasing of real property by the Trust is not incidental to the carrying on of a business and is not an integral part of any business.
The Trust provides tenants with basic services (electricity, heating and water) including maintenance of the building itself and maintenance of adjacent areas. In the case of commercial properties, some cleaning and security services are also provided to the leased premises.
In all cases, the management of the real property is delegated to a person dealing at arm's length with the Trust, its trustees or beneficiaries.
Question to the CRA
Is a trust that holds buildings under the above conditions, but hires an external manager to provide services to tenants, carrying on a business?
CRA Response
Generally, a personal trust may carry on a business as long as this does not contravene its governing document.
In this case, the Trust hired an outside manager at arm's length from the Trust, its trustees or beneficiaries. It would have delegated the management of its real estate to him. We understand, however, that it is the Trust itself that provides its tenants with basic services, as well as certain cleaning and protection services in the case of commercial rental properties, and that the manager ensures that those services are provided to the tenants. In such a case, even though the Trust and the Manager are generally at arm's length, it seems reasonable to consider that the Manager, in its management and services, is acting on behalf of the Trust.
Paragraph 2 of IT-434R explains the impact of such a delegation of the management of real property on the nature of the income from that real property as follows:
2. The delegation by the owner of real property of its management and supervision to an agent will not, in itself, alter the nature of the rental income. If the renting of the property would have constituted a business when carried on by the owner himself, it will still be a business when undertaken by an agent on the owner's behalf.
In other words, having an external manager responsible for providing some of the services offered does not in itself change the nature of the income earned by the Trust.
Furthermore, to determine whether or not the Trust is carrying on a business, it is relevant to refer to paragraph 4 of that same bulletin. It provides a general explanation of the principles recognized by the jurisprudence regarding the leasing of real property by an individual. It reads as follows:
4. 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.
For information purposes, the following paragraphs of the same bulletin list the basic services (e.g. heating, parking, laundry room, etc.) that are generally considered to be an inherent part of the rental activity. It is also explained that where additional services are provided, it is possible that the landlord is carrying on a business rather than simply renting out real estate. In that regard, Interpretation Bulletin IT-434R refers, for example, to cleaning and protective services in respect of rented accommodation.
In the situation described, it would therefore be possible to consider that the Trust is carrying on a business because of the number and nature of the services offered. However, that remains a question of fact and it would be necessary to examine all the facts relating to a particular situation to be able to conclude on this subject. It is not possible to make a determination in the hypothetical situation as described. That being said, the fact that the Trust entrusts an external manager with the responsibility of providing some of the services it offers as a landlord will not in itself have any impact on the nature of its income.
Michel Ostiguy
October 7, 2021
2021-090091
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-434R (archived), "Rental of Real Property by Individual", April 30, 1982.
2 It should be noted that subsection 104(2) I.T.A. deems a trust to be an individual for the purposes of the Income Tax Act in respect of the property of the trust.
UNCLASSIFIED