15 November 2006 Internal T.I. 2006-0202971I7 - Regulations 238

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.

Principal Issues: Whether section 238 of the Income Tax Regulations applies to real estate developers who hire a contractor to construct buildings and then sell the units if more than 50% of the developers' business income would be derived from the sale of the constructed units.

Position: Yes. Regulation 238 would generally apply to a real estate developer whose business income was primarily derived from construction if more than 50% of the developer's business income was from construction activities.

Reasons: The phrase "income derived from" has been broadly interpreted by the Supreme Court in the case of MNR v. Hollinger North Shore Exploration Co. Ltd. Therefore, a real estate developer who hires a general contractor to construct buildings and then sells the completed units, would be considered to derive his income primarily from construction activities if more than 50% of his income was derived from these activities.

			November 15, 2006

	HEADQUARTERS	HEADQUARTERS
	Small & Medium Enterprises Directorate	Income Tax Rulings
	Compliance Programs Branch	  Directorate
G. Moore
	Attention:  Fran Henderson	(613) 957-9232
	                  A/Manager       			2006-020297

Regulation 238 Filing Requirements

This is in response to your memorandum of August 25, 2006, regarding the reporting requirements for section 238 of the Income Tax Regulations (the "Regulations"). In particular, you have asked for our views on whether a real estate developer is required to file a T5018 Summary to comply with section 238 of the Regulations.

For example, XXXXXXXXXX invests in property, hires a general contractor, who in turn pays subcontractors, to construct a building and then sells the units/suites. All of its revenue is derived from the sales of the units. Does section 238 of the Regulations require a real estate developer, who uses a general contractor to construct a building for the purpose of selling the constructed building, to file a T5018 Summary, including payments made to the general contractor?

Our Comments

Subsection 238(1) of the Regulations is as follows:

"(1) ["Construction schedules"] - In this section, "construction activities" includes the erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of all or any part of a building, structure, surface or sub-surface construction, or any similar property."

Subsection 238(2) provides that every person or partnership that pays or credits, in a reporting period, an amount in respect of goods or services rendered on their behalf in the course of construction activities shall make an information return in the prescribed form in respect of that amount, if the person's or partnership's business income for that reporting period is derived primarily from those activities.

With respect to the meaning of "derived primarily from those [construction] activities" in subsection 238(2) of the Regulations, we note that the expression "income derived from" has been broadly interpreted by the Supreme Court in MNR v. Hollinger North Shore Exploration Co Ltd., 63 DTC 1031, as follows:

"Shortly stated, appellant's position is (1) that the expression "income derived from the operation of a mine" in Section 83(5) refers to income from a particular source namely the operation of mine (2) that the operation of a mine being a business, the income exempted from taxation is the profit from such business received by the particular corporation claiming the exemption, and (3) that the source to respondent of the income in issue here was merely the property right for which royalty was payable and not the operation of a mine.

I share the view expressed by the learned trial judge that the ordinary meaning of the words "derived from the operation of a mine" is broader than that contended for by appellant, that the word "derived" in this context is broader than "received" and is equivalent to "arising or accruing " (vide C.I.R. v. Kirk, [1900] A.C. 588 at 592) and that the expression is not limited to income arising or accruing from the operation of a mine by a particular taxpayer.

The mine in question was operated as a unit by respondent and Iron Ore Company of Canada as a joint venture far their joint benefit, and the ore in place represented a capital investment of both companies. A return on that capital investment could be realized only through the operation of the mine, and in the circumstances here, in my opinion, such operation was the source of respondent's income within the meaning of Section 83(5), whether that income came from the extraction and sale of its own ore or from the royalty paid to it with respect to the remainder of the ore belonging to the Iron Ore Company of Canada."

Consequently, it is our view that the expression "derived primarily from these [construction] activities" can be interpreted broadly to include a real estate developer that has more than 50% of its business income derived from construction activities. It is also our view that section 238 of the Regulations would apply to real estate developers such as XXXXXXXXXX. who hire a general contractor to construct buildings and then sell the units. XXXXXXXXXX.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

S. Parnanzone
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch