5 June 2001 Internal T.I. 2001-0075677 - BED AND BREAKFAST BUSINESSES

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 subsection 18(12) of the Act applies to a B&B business.

Position: Depends on the facts but generally yes.

Reasons: The intention of Parliament in introducing the rules in subsection 18(12) of the Act were clear in respect of a B&B business. Case law has generally upheld the application of the subsection to B&B businesses. Audit has issued a memorandum on May 9, 2001 in respect of the application of subsection 18(12) of the Act to the same TSO with which we agree.

		June 5, 2001

	XXXXXXXXXX 	HEADQUARTERS
	XXXXXXXXXX  TSO	Patrick Massicotte
	Verification and Enforcement Division	(613) 957-9232

2001-007567

Bed & Breakfast Business

This is in reply to your letter of March 13, 2001, regarding the application of subsection 18(12) of the Income Tax Act ("Act") to a Bed & Breakfast ("B&B") business. Our comments are based on the information you have provided with your request.

Facts

The taxpayer owns a property where the main floor is partly shared with the guests and two other floors are exclusively available to guests. The basement of the property is used as the owners' living quarters. All the floors share the same electrical, water and heating facilities and the only kitchen is located on the main floor. Presently, only the third floor rooms are rented to students on a weekly basis. Only breakfasts are provided to the guests on a regular basis but the owner also shares other meals on occasion with the guests (students).

Our Comments

The intention of Parliament was clearly established in respect of the applicability of subsection 18(12) of the Act to B&B businesses when the new rules were introduced in 1987. The provisions should generally apply to B&B businesses. We have issued letters confirming this position in the past (see documents # E 2000-0051907 and E 9816177).

Recent decisions of the Tax Court of Canada have also examined this issue (see Ronald Broderick v. H.M. The Queen, Docket # 2000-3935(IT)I (TCC); Klaus Sudbrack v. H.M. The Queen, 2000 DTC 2521 (TCC); Constance Maitland v. H.M. The Queen, Docket # 1999-4957(IT)I (TCC)) and have generally upheld this position, except in the Sudbrack case. In the Broderick case, the Court distinguished the Sudbrack decision based on its particular facts. It observed that the taxpayer's home in the Sudbrack case was installed in a separate and private living area, which was incidental to the B&B business operation, representing the predominant use of the building. In addition, the Court essentially found that the taxpayer's business in that case consisted of an elaborate country inn. Three different dining rooms were added to the inn as fine dining and gourmet menu was a major focus of the operations. In the Court's opinion, the Sudbrack operations did not constitute a bed and breakfast business within the normal meaning of the words.

In our view, subsection 18(12) of the Act would generally apply to all bed and breakfast operations, within the normal meaning of the words, unless they specifically meet the factual situation described in the Sudbrack case. We also note that your section has consulted with the Technical Applications Division of the Audit Directorate on the same issue on March 6, 2001.

As mentioned in the memorandum issued by the Audit Directorate, the issue must be determined based on the facts of each case individually. In this case, based on the limited facts provided, the taxpayer's operations do not seem to be comparable to an elaborate operation similar to the facts in the Sudbrack decision. Moreover, although a considerable number of rooms seem to be available for the B&B business, the owner's living quarters do not appear to constitute a self-contained dwelling unit as they are not private and have no separate facilities apart from the rest of the building. Considering that subsection 248(1) of the Act defines a "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", we note that the taxpayer must share the use of at least the kitchen on the main floor and potentially has the use of the entire upstairs area for its personal use and enjoyment whenever there are no guests. In our opinion, it seems the whole property is the taxpayer's "self-contained domestic establishment" and subsection 18(12) of the Act should apply to such a situation.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. 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 LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898.

We trust that these comments will be of assistance to you.

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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