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 income earned by partnership is business or property income.
Position: Based on brief description appears to be property income.
Reasons: Question of fact
Lena Holloway, CA
XXXXXXXXXX 613-957-2104
2004-006118
April 28, 2004
Dear XXXXXXXXXX:
Re: Non-resident Limited Partner's Income from a Canadian Partnership
This is in response to your letter of February 5, 2004 requesting an interpretation on the characterization of income earned by a non-resident limited partner for tax purposes. In the scenario you presented, the limited partner is a non-resident trust. The partnership is registered in Ontario, owns commercial buildings and rents to commercial tenants. The income earned by the limited partnership is derived solely from the rental of Canadian real estate. A management group in Canada administers the limited partnership and all of its activities including the negotiation of leases, collection of rents, payment of expenses and engagement of parties to provide some services to the building. You have asked us to comment on whether the rental income earned by the partnership would be considered income from a business, or property income.
As noted in Information Circular IC 70-6R5, written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments, which are not binding on the Canada Revenue Agency (the "CRA").
It is a question of fact whether or not rental income is considered business income or property income. Paragraphs 2 through 8 of Interpretation Bulletin IT-434R Rental of Real Property by Individual provides general information on the guidelines used to determine whether rental income constitutes business or property income. In particular, the number and nature of services provided to the tenants by the landlord is a key factor in determining whether the landlord is carrying on a business, or earning property income. Where only basic services are provided such as building maintenance, heat, air conditioning, water, elevator service and parking, the operation is likely not considered to be a business.
On the other hand, if the landlord provides numerous services including services not normally associated with a basic rental operation, such as office security and office cleaning, then this may indicate that the landlord is carrying on a business. In order to provide any definitive comments, we would need to review all of the facts and documentation including the lease agreements, the number and nature of the services provided, and the partnership agreements.
The tax treatment of rental income earned by a non-resident depends upon whether or not the rental operation is considered to be a business carried on in Canada. Where the rental operation is not considered to be a business, the gross rental income is subject to non-resident withholding tax pursuant to paragraph 212(1)(d) of the Income Tax Act (the "Act"), together with subsection 212(13.1) of the Act which deems a partnership (other than a Canadian partnership) to be a non-resident person for the purpose of Part XIII. Alternatively, the non-resident partner may elect under section 216 to file an income tax return and pay tax under Part I on the partner's share of the income of the partnership, as though the non-resident person were a person residing in Canada, but without being allowed any deductions from that income for the purpose of computing taxable income (i.e., Division C deductions). Please refer to IT-393R2 Election re Tax on Rents and Timber Royalties - Non-Residents and Information Circular IC 77-16R4 Non-Resident Income Tax for more information in this regard.
Where on the other hand, a business is considered to exist, taxable income earned in Canada will generally be computed pursuant to subsection 115(1) of the Act, subject to subsection 96(1), and the non-resident partner will be taxable under Part I of the Act.
The publications mentioned above can be obtained from our website at www.cra.gc.ca.
We trust our comments will be of assistance to you.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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