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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: A Tax Services Office has written to us about work space in the home expenses (subsection 18(12) of the Income Tax Act (the "Act")) where, in respect of past taxation years, an individual's business expenses exceeded the individual's income from her business (the business is providing care to children) such that she has a carry forward of work space expenses. As the individual is going to take a period of "maternity leave", we have been asked about the carry forward of the excess expenses.
Position: (i) It is our view that if the individual did not carry on the business operation for a full taxation year (i.e., from January 1 to December 31 of the year following the year in which there was a temporary cessation of the business), it would no longer be possible to carry forward any excess expenses.
(ii) It is our view that the business carried on before and after the temporary cessation would have to be construed to be the same business by virtue of the wording in subsection 18(12) of the Act. Whether such is the case involves a question of fact.
Reasons: (i) By virtue of paragraph 18(12)(c) of the Act, if the conditions of paragraph 18(12)(a) of the Act are not satisfied in a taxation year, the carry forward of work space expenses from the immediately preceding year could not be carried forward to any other year, as the carry forward would no longer be "by reason only of" paragraph 18(12)(b) of the Act.
(ii) Paragraphs 18(12)(b) and (c) use the phrase "the business". IT-206R provides guidelines on whether the same business can be considered to be carried on where there are successive business operations.
August 27, 2002
Edmonton Tax Services Office HEADQUARTERS
Edmonton Business Window M. Eisner
(613) 957-2138
Attention: Kent Hendricks
2002-014096
Expenses - Work Space In Home
This is in reply to your memorandum of May 14, 2002, concerning the above-noted subject.
You have asked us to consider a situation where a self-employed client ("Individual A") uses some of the space in her home to run a day care business. Since the expenses of the business have exceeded her income from the business in the past couple of years, she has a carry forward of work space in the home expenses pursuant to subsection 18(12) of the Income Tax Act (the "Act"). Individual A is now planning to temporarily cease the carrying on of the business while she is on maternity leave.
The client has asked whether the temporary maternity leave would jeopardize her ability to carry forward the work space in the home expenses. In connection with this concern, you have asked us (i) whether it would make a difference if the maternity leave was for a period of less than one year, such that business resumes in the next year; (ii) whether it would make a difference if the maternity leave was for more than a full taxation year (for example, the business ceases in 2002 and resumes in 2004); and (iii) whether it would make a difference if care was being provided to the same children when the business restarted.
As you are aware, the CCRA's general position on work space in the home expenses is set out in Interpretation Bulletin IT-514.
At the outset, we note that we have not reviewed Individual A's expenses to determine the extent that there is a carry forward of expenses to other years by virtue of subsection 18(12) of the Act. In addition, the determination of the deductibility of work space expenses in a future year involves a period of time that has not yet elapsed and the ultimate determination of the deductibility of expenses carried forward under subsection 18(12) of the Act involves a question of fact. Accordingly, our comments on the above situation must be construed as being general in nature and relate to a valid carry forward of expenses (we have presumed that Individual A had met the requirements of subsection 18(12) of the Act to deduct or carry forward work space in the home expenses prior to the maternity leave). Our comments are also premised on a fiscal period that ends on December 31.
With respect to a carry forward of work space in the home expenses to a taxation year, paragraph 18(12)(c) of the Act provides that the amount of such expenses "not deductible by reason only of paragraph (b) ... for the immediately preceding taxation year", is deemed to be an amount otherwise deductible, but subject to the conditions set out in paragraphs 18(12)(a) and (b) of the Act. Comments concerning paragraphs 18(12)(a) and (b) of the Act are set out in paragraphs 1 and 4 in IT-514 from which excerpts have been set out below:
"1. Subsection 18(12) provides that a self-employed individual, in computing income from a business for a taxation year, is not entitled to any deduction for expenses otherwise deductible under the Act related to any part (hereinafter referred to as "work space") of a self-contained domestic establishment in which the individual resides, except where the work space is either
(a) the principal place of the business of the individual, or
(b) used exclusively to earn business income and on a regular and continuous basis for meeting clients, customers or patients of the individual in respect of the business."
"4. An individual who carries on a business in a work space, and has met the test in either 1(a) or (b) above, will be able to deduct only the expenses related to the work space to the extent they are otherwise deductible and do not exceed the income from the business for the taxation year, carried on in the home or elsewhere, determined prior to deducting the expenses related to the work space" (and without reference to sections 34.1 and 34.2 of the Act).
Thus, paragraph 4 of IT-514 indicates that, pursuant to paragraph 18(12)(b) of the Act, work space in the home expenses cannot create or increase a loss for income tax purposes from the business for which the work space is used.
By virtue of paragraph 18(12)(c) of the Act, if 1(a) or (b) above (i.e., paragraph 18(12)(a) of the Act) is not satisfied in a taxation year, it is our view that the carry forward of work space in the home expenses from the immediately preceding year could not be carried forward to any other year, as the carry forward would no longer be "by reason only of" paragraph 18(12)(b) of the Act. This view is consistent with the comments in paragraph 5 of IT-514, wherein it is stated that "Where in that immediately subsequent taxation year the test in 1(a) or (b) above is met, the portion of the expenses carried forward ... may be deducted to the extent permitted by 4 above, and any excess is carried forward to the next year. Thus an indefinite carry forward is provided as long as either 1(a) or (b) above is met on a continuous basis."
In relation to your situation, it is our view that if Individual A did not operate her child care business at all during a taxation year (i.e., the immediately following year), any amount carried forward to that year could not be deducted in that year and could no longer be carried forward to another year. On the other hand, if "the business" (see comments below) temporarily ceases in year 1, resumes in the immediately following year (year 2), and the conditions of paragraph 18(12)(a) of the Act are met in year 2 with respect to the business, work space in the home expenses may be carried forward and deducted in year 2 to the extent provided in paragraph 18(12)(b) of the Act.
We also note that if Individual A wishes to carry forward work space expenses to the immediately following taxation year (when business is resumed), it is our view, as a result of the wording in subsection 18(12) of the Act (in particular, the references to "the business" in paragraph 18(12)(c) of the Act), that Individual A would have to be considered to be carrying on the same business both before and after the maternity leave. With respect to the issue of whether a subsequent business operation carried on by Individual A can be considered to be the same as the business carried on before the maternity leave, reference may be made to the following excerpt from paragraph 4 of IT-206R which discusses successive business operations:
"Where one business operation succeeds another the following comments may be of assistance in determining if the two businesses are the same business:
(a) where the succeeding business operation is not the same kind as the former, the two operations will be viewed as different businesses at the different times and no other factors will operate to change that view;
(b) where a business operation ceases or is disposed of and following this the same taxpayer acquires another business operation of the same kind, the two business operations will normally be considered to be the same business if the second business operation is purchased on or around the same time that the first operation is disposed of or it can be established that a second operation was contemplated at the time of disposition of the first operation;"
In addition, we would also refer you to the guidelines in paragraph 5 of IT-206R and would, in particular, note that in determining whether business operations are of the same kind, the principal factor to be considered is the type of business that a taxpayer is in.
Although the issue of whether Individual A would be carrying on the same business is ultimately a question of fact, in a situation where Individual A ceases to carry on the child care operation for a year or less as a result of maternity leave, with the intention of resuming the operation after the leave, and subsequently carries on the same type of business in the immediately following year, we would generally expect that the two operations could be considered to be the same business (it is not necessary that Individual A continue to care for the same children with respect to the second operation).
We hope that these comments will be of assistance.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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