CRA reaffirms that significant additional services transform rental income into income from services

Would the owner of a qualifying property that operates a hotel, or other similar business such as a motel or a bed and breakfast, be considered to use the property primarily to earn rental income as described in para. (b) of the definition of “qualifying rent expense” in s. 125.7(1), such that it would be prevented from claiming the Canada emergency rent subsidy (“CERS”)? CRA stated:

Generally, any income earned from the use or occupation of a property or a right to use or occupy property is considered to be rental income. However, where, in addition to basic services that are customarily supplied with rental of real or immovable property, an entity also provides significant additional services that are integral to the success of its ordinary activities, it is the CRA’s longstanding position that the entity would be earning income from the services provided instead of earning rental income from the use or occupation of the property.

CRA went on to indicate that the application of these tests was a question of fact, and did not repeat its vintage statement in IT-73R6 that a “corporation that operates a hotel is generally considered to be in the business of providing services and not in the business of renting real property.” Nonetheless, it appears that CRA would continue to view a full-service hotel as not generating rental income.

Neal Armstrong. Summary of 16 July 2021 Internal T.I. 2020-0872521I7 under s. 125.7(1) - “qualifying rent expense” – para. (b).