IT
INCOME TAX ACT
Rental of Real Property by Individual
IT-434R April 30, 1982
Section 3 (also sections 9 and 216, and subsections 2(3), 74(1),
74(5), 75(1), 115(1), 120(1) and 120(2), and paragraphs 63(3)(b),
120(4)(a) and 146(1)(c), and Part XIII, and subsections 1100(3) and
2602(1) and Part XXVI of the Income Tax Regulations)
This bulletin cancels and replaces Interpretation Bulletin
IT-434 dated July 23, 1979 and Special Release dated September 14,
1979. Current revisions are designated by vertical lines.
1. Subsection 9(1) of the Act prescribes that a taxpayer's
income for a taxation year from a business or property is the profit
therefrom 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 a different tax treatment than income from property. The criteria
for determining whether a rental operation carried on by an individual
is a source of business income or of property income are discussed
in 2 to 8 below and the income tax consequences resulting from the
classification of rental income as business income or as property
income are discussed in 9 to 19 below.
Nature of Rental Operation
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.
3. Where the renting of real property to others by an individual
is incidental to, or is part of the fabric of, his business, the
renting will be regarded as a business operation and any rental income
or loss will form part of the individual's business income or loss;
examples are the renting of temporarily unused space in the taxpayer's
factory or warehouse and the renting of land held for future expansion.
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.
5. Where a building is rented en bloc (e.g., an office building),
with the landlord providing (in addition, of course, to the accommodation)
only maintenance of the building as such and perhaps heat and air
conditioning, the rental clearly is one of property and does not
constitute the carrying on of a business. The same situation is considered
to exist where a building is rented piecemeal (e.g. an apartment
block) and the tenants are provided with only those basic services
which, by custom, have come to be regarded as an inherent part of
that kind of property rental, e.g.: heat, water, elevator service,
telephone in lobby, indoor or outdoor parking spaces, laundry room
with equipment for tenants, maintenance of the building itself (including
janitor and window washing service, repainting of apartments), maintenance
of adjacent areas (including snow and garbage removal service) and
maintenance of any appliances and furnishings provided in the rented
accommodation.
6. 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, and the more
services he provides the more it becomes arguable that this is so.
At this point, both the basic services and the number and kinds of
additional services provided for, or made available to, tenants must
be considered. For example, the landlord of an office building may
not only supply the services basic to its operation but, in addition,
office cleaning and protective services in respect of the rented
accommodation; these latter could be the decisive factors in a determination
that a business is being carried on. In the case of an apartment
block, it is the extent to which basic and additional services are
supplied to tenants that will determine if its operation is a business.
These latter may include, but are not necessarily limited to, 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, a mail and parcel pick-up and delivery
service, etc.
7. The operation of a rooming or lodging house that does
no more than rent rooms is likely to be a rental business because
of the supplying of cleaning and maid services, linens, washroom
supplies and so on. The operation of a trailer court or campground
where all services are provided, e.g., laundromat, cafeteria, swimming
pool, showers, playgrounds, etc. and the operation of a hotel, motel
or boarding house of any size would be a business, but not a rental
business due to the magnitude of services provided.
8. Where two or more individuals participate in a rental
operation, the question of whether it is a business still must be
determined according to the principles outlined above. The fact that
a rental operation is carried on by what appears, or purports, to
be a partnership does not, in itself, justify an assumption that
the operation therefore must be a business. Where, however, the application
of those principles indicates that a rental operation is a business,
the fact that the relationship of its owners appears, or is claimed,
to be that of partners rather than merely co-owners tends to confirm
the other indications that it is indeed a business. (See the comments
in IT-90 "What is a Partnership?".)
Nature of Rental Income - Income Tax Consequences
9. Certain situations where it will be significant to determine
whether the income from the rental of real property by an individual
constitutes business or property income are outlined in the paragraphs
that follow.
Attribution of Income from Property Transferred
10. Subsections 74(1) and 75(1) provide that any income or
loss arising from property transferred either to the transferor's
spouse or to a minor is deemed to be income or a loss of the transferor.
Effective December 12, 1979, subsections 74(7) and (8) provide that
subsection 74(1) will not apply to a transfer of property to a spouse
who is living apart from the transferor and is separated pursuant
to a decree, order or judgement of a competent tribunal or a written
separation agreement. Where the separation is pursuant to a written
separation agreement, the separation must be of at least twelve months
duration commencing from the date on which the written separation
agreement was entered into, but where the spouses cease to live apart
from the taxpayer within those twelve months subsections 74(1) and
(2) apply retroactively to the commencement of the twelve month period.
Subject to this exception, subsections 74(1) and 75(1) can be applied
only when transferred property is productive of income from "property",
such as rentals. Accordingly, subsections 74(1) and 75(1) do not
apply to attribute income from a business to the transferor even
if the business operates with some or all of the property obtained
originally from the transferor. Neither will these subsections apply
where a rental operation that itself constitutes a business has been
transferred to a spouse or minor. (For more detailed discussion on
subsections 74(1) and 75(1) see IT-258R, "Transfer of Property to
a Spouse" and IT-260R, "Transfer of Property to a Minor").
Husband and Wife Partnership
11. For fiscal periods ended prior to December 12, 1979,
where spouses were partners in a rental business, the Minister may,
by virtue of subsection 74(5), deem the entire income from the rental
business to be income of one spouse. Subsection 74(5) will be applied
where one of the spouses neither actively participates in, nor invests
his or her own property in, the business of the partnership. Subsection
74(5) has been repealed applicable with respect to fiscal periods
ending after December 11, 1979 but section 103 will continue to be
applicable.
"Earned Income" (Paragraph 146(1)(c))
12. Rental income from real property, whether business or
property income, constitutes "earned income" for purposes of calculating
the deduction allowable for registered retirement savings plan premiums
paid. On the other hand, rental income from chattels or any other
class of property would constitute "earned income" for this purpose
only if it can be regarded as income from carrying on a business
either alone or as a partner actively engaged in the business (see
13 below) since the phrase "real property" in the definition of
"earned income" means land and building only. However, where rentals
from chattels or any class of property included in, or associated
with, real property is received in one amount with rental from real
property (as, for example, when a house is rented furnished), the
Department takes the position that, as a general rule, no breakdown
of such amount need be made and the total amount of rent may be dealt
with as income from real property.
"Earned Income" (Paragraph 63(3)(b))
13. For purposes of calculating the child care expense deductions,
the "earned income" of an individual, as defined in paragraph 63(3)(b),
must be taken into account. This definition includes "his incomes
from all businesses carried on either alone or as a partner actively
engaged in the business" but does not include income from property.
Thus, rental income can be included in the calculation of "earned
income" only where it constitutes income from a business that is
carried on either as a sole proprietorship or, in the case of a partnership,
by a partner actively engaged in the business. For purposes of this
paragraph and 12 above, to be considered "actively engaged in the
business" of a partnership, a partner would normally be expected
to contribute time, labour and attention to that business to a sufficient
extent that such contributions would be a determinant in the successful
operation of the business.
Allocation of Income from Rental Operations to a Particular
Province
14. Where an individual who is a resident of Canada earns
or receives rental income from real property in a province or territory,
all rental income, wherever earned or received, is deemed to be income
earned in the province or territory in which the individual resides
on the last day of the taxation year, if the rental income constitutes
income from property. On the other hand, if the rental income constitutes
business income, the rental income must be allocated to the permanent
establishment in the province through which it was earned in accordance
with Part XXVI of the Regulations.
Rentals Received by Non-Resident from Real Property Situated
in Canada
15. Where the renting of real property by a non-resident
individual is a business carried on in Canada, the taxable income
will be computed pursuant to subsection 115(1). The individual will
be taxable under Part I by virtue of subsection 2(3) and, in addition,
pay provincial income tax on the rental income earned in a province.
In calculating taxable income, the individual will be eligible for
Part I deductions (including Division C deductions to the extent
set out in IT-171 "Taxation of Non-Residents - Determination of
Taxable Income Earned in Canada").
16. Where the non-resident's rental operation is found not
to be a business or part of a business, the income therefrom is not
computed under subsection 115(1). Instead, the individual will be
subject to Part XIII tax on the gross amount of rent received. Alternatively,
the individual may elect under section 216 to file an income tax
return and pay tax under Part I on that income, as though he were
a person resident in Canada, but without being allowed any deductions
from that income for the purpose of computing taxable income (i.e.
Division C deductions). (See IT-393 "Election re Tax on Rents and
Timber Royalties - Non-Residents"). Further if the non-business
rental income is the only income that an individual who was non-resident
throughout the year would report in an income tax return under subsection
216(1), then there is no "income earned in the year in a province"
within paragraph 120(4)(a), since subsection 2602(1) of the Regulations
in effect provides that the income earned in a province by an individual
who did not reside in Canada at any time in the taxation year does
not include income from property. It follows that the individual
is liable for the additional tax under subsection 120(1) upon the
rental income subject to the election and that he will not be required
to pay provincial income tax on the rental income earned in an agreeing
province.
Computation of Net Rental Income
17. The characterization of rental income will, in some instances,
also affect the deductions which may be claimed in computing net
rental income. For instance, an amount paid for a utility service
connection is deductible as an expense only in computing income from
a business. In other cases, the characterization will affect the
quantum of an otherwise deductible amount, as set out below.
Capital Cost Allowance Claims - Rental Property versus
Business Property
18. Whether the renting of real property by an individual
is a business or not, the depreciable property (ie. a building other
than a building of Class 31 or 32) is considered a "rental property"
for purposes of capital cost allowance. The amount of capital cost
allowance the individual may claim is restricted by subsection 1100(11)
of the Regulations as set out in IT-195R2 "Rental Property - Capital
Cost Allowance Restrictions".
Capital Cost Allowance Claims - Taxation Year of Lessor
19. Where the renting of real property by an individual is
a business, the taxation year in respect of the real property-means,
for capital cost allowance purposes, the fiscal period of the business
ending in the calendar year. On the other hand, where the rental
operation is not a business, the taxation year for which any capital
cost allowance in respect of the real property may be claimed is
always the calendar year. The distinction between business property
and non-business property is of importance in the application of
Regulation 1100(3), as set out in IT-172R "Capital Cost Allowance
- Taxation Year of Individuals".
Travel Expense Claims
20. The extent to which travel expenses are deductible when
the rental operation is a business and when it is not is commented
on in paragraphs 10 to 12 of IT-180 "Automobile Expenses Claimed
by Self-Employed Individuals".
Last updated on 1994-02-21.
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