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 subsection 18(12) applies in situation where two taxpayers operate a bed & breakfast in a house in which they reside?
Position: Yes.
Reasons: The house is a "self-contained domestic establishment" as defined in subsection 248(1) of the Act.
July 28, 1998
XXXXXXXXXX Tax Services HEADQUARTERS
Office Exam Wm. P. Guglich
(613) 957-2102
Attention: XXXXXXXXXX
981617
XXXXXXXXXX - Application of Subsection 18(12) of the Act
This is in response to your memorandum dated June 18, 1998, concerning the application of subsection 18(12) of the Income Tax Act (the “Act”) to taxpayers who operate a bed and breakfast.
You described a situation where two taxpayers operate a bed and breakfast in a three story, 3500 square foot house. The two taxpayers, along with a son of one of the taxpayers and another gentleman live in the house. In addition to the bed and breakfast business, the two taxpayers carry on other separate businesses. Sixty percent of the house is dedicated to the bed and breakfast which includes the bedrooms, sitting area for the guests, storage area for the bed and breakfast items, and a shared laundry area.
It is your view that subsection 18(12) of the Act applies to limit the amount of expenses that may be deducted respecting the bed and breakfast on the basis that the house is a self-contained domestic establishment, as this is where the taxpayers reside, eat and sleep.
The taxpayer does not consider that subsection 18(12) of the Act applies on the basis that:
a) the bed and breakfast is a retail business and not a home based business and is taxed as such,
b) the bed and breakfast is a rental business - a rooming house and not a domestic establishment and taxed accordingly, and
c) the taxpayers pay $1200 - $1800 a month to live there.
Our Views
As discussed in Interpretation Bulletin IT-514, Work Space in Home Expenses subsection 18(12) of the Act limits the amount of business expenses that may be deducted where the business is carried on in part of a self contained domestic establishment in which the individual resides.
We agree that the bed and breakfast operated by the taxpayers is a business. However, subsection 18(12) applies if the business is carried on in any part of a self contained domestic establishment in which the individual resides. “Self contained domestic establishment” is defined in subsection 248(1) of the Act to mean: “a dwelling-house, apartment or similar place of residence in which place a person as a general rule sleeps and eats.” “Dwelling house” is not defined in the Act, so the ordinary-common definition must be applied. Oxford Dictionary, New Edition, defines “dwelling house” as: “a house used as a residence, not as an office etc.”
As to the taxpayer’s contention that this is a rooming house, we refer you to the case of Mahomed v. Anchor Fire and Marine Insurance Co. 15 D.L.R. 405 (see copy attached), where the Supreme Court of Canada held that: “a dwelling house does not cease to be such simply because one or more lodgers are taken in by the occupants.”
The comments, in the Department of Finance 1987 Tax Reform Documents (see attached), respecting the enactment of subsection 18(12) of the Act, indicate that it was intended that subsection 18(12) be applied to a bed and breakfast business. You will note the following under the examples of the application of this provision:
“A person who lives in the building in which he or she operates a grocery store, a barber shop or a bed and breakfast business will be able to claim all currently allowable expenses to the extent of the income from that business.”
In the present case, the taxpayers do live or reside, eat and sleep in the house where the bed and breakfast is operated. The house would therefore be considered, for purposes of subsection 18(12) of the Act, a “self contained domestic establishment in which the individuals reside.” In our view, subsection 18(12) of the Act should be applied to restrict the amount of expenses deductible in respect of the bed and breakfast operation. The business expenses related to the bed and breakfast would be deducted on line 9945 of Form T2124 E (97) Statement of Business Activities. This is explained in the 1997 Business and Professional Income Guide.
We trust our comments will be of assistance.
J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosure
