Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether 18(12) restrictions apply to bed and breakfast operations
Position: 18(12) applies
Reasons: Consistent with prior opinions
November 23, 2000
Compliance Programs Branch HEADQUARTERS
Sandy Wilson Wayne Antle
Verification Division (613) 957-2102
344 Slater Street, 18th Floor
Canada Building
2000-005190
Application of Subsection 18(12) of the Income Tax Act (the "Act")
This is in response to your memorandum dated October 19, 2000 concerning the application of subsection 18(12) of the Act to bed and breakfast ("B&B") operations. You have summarized the facts as follows:
The taxpayer owns land and a building that is used both as his personal residence, and to operate a B&B business. Some areas of the building are used exclusively for personal use (family bedrooms and bathrooms), some parts are used for both personal and business reasons (hallways, kitchen, laundry etc.), and some areas are utilized only for the business (guest bedrooms and bathrooms). The expenses related to the building are apportioned between business and personal use on a reasonable basis. The expenses related solely to the B&B operation are deducted in full.
In your view, subsection 18(12) of the Act applies to the business expenses related to the building such as interest, property taxes, utilities etc. Therefore, the taxpayer would only be able to claim such expenses to the extent that he has income from the business.
The taxpayer argues that this provision should only apply to an office or "workspace" in a home, and not to a B&B. It is in the very nature of a bed and breakfast operation that the owner reside in the house. He points out that he would not face these restrictions if he lived next door to the B&B, or if he operated a hotel or motel instead of a B&B.
We agree with your view that subsection 18(12) applies to the situation outlined above. This provision is applicable where any part of a self-contained domestic establishment in which the taxpayer resides is used to earn income from a business. Subsection 248(1) of the Act defines self-contained domestic establishment as "a dwelling-house, apartment or other similar place of residence in which place a person as a general rule sleeps and eats". In our view, this provision is not limited in its application to home office expenses, but would apply when any business (for example a store, professional practice, or B&B) is carried on in part of a self-contained domestic establishment in which the taxpayer resides. As stated in our earlier correspondence, this is consistent with the comments in the Department of Finance 1987 Tax Reform Documents wherein one of the examples used to illustrate the provision refers to the operation of "a grocery store, a barber shop, or a bed and breakfast business".
It should be noted that, in the above case, the particular business expenses are not disallowed by reason of paragraph 18(12)(a) of the Act, since the house in which the taxpayer resides is his principal place of business. However, paragraph 18(12)(b) limits the deduction of these expenses to the income from the business. Any expenses not deducted due to this restriction may be carried forward indefinitely and applied in subsequent years to the extent of income from the B&B business in those years. Please refer to IT-514 for more information in this regard.
We trust that our comments will be of assistance.
John Oulton
Manager
Business, Property, and
Employment Income Section
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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