18 November 2005 External T.I. 2005-0141551E5 - Leasing Property

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: Interpretation of 1100(15) and 1100(17)

Position: General comments given

XXXXXXXXXX 2005-014155
G. Moore
November 18, 2005

Dear XXXXXXXXXX:

Re: Subsections 1100(15) and (17) of the Income Tax Regulations

This is in response to your enquiry of July 12, 2005, concerning subsections 1100(15) and (17) of the Income Tax Regulations (the "Regulations").

You have asked for our comments in the following scenario. Taxpayer A owns two corporations H and C, both of which are Canadian Controlled Private Corporations and associated under subsection 256(1)(b) of the Income Tax Act (the "Act"). Taxpayer A operates the trucking business through H and C. H owns the assets (truck terminals and stainless steel tankers) of the business and C conducts the actual transportation business. H rents the truck terminals and tankers to C at market values. Income earned by H from these rentals would be active business income under subsection 129(6) of the Act. H has net rental income from renting terminals to C. H has a net rental loss from renting tankers to C if capital cost allowance ("CCA") is claimed without the restriction subsection 1100(15) of the Regulations.

Assuming the CCA restriction under subsection 1100(15) applies to the net rental income from the tankers, you are asking whether the net rental income from the terminals can be offset by the net rental loss from the trucks. You also ask for our interpretation regarding the meaning of "income" in subparagraph 1100(15)(a)(i) of the Regulations.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Subsection 1100(15) of the Regulations limits the amount of CCA that can be claimed on leasing property owned by a taxpayer, with certain exceptions, in order to prevent a taxpayer from creating or increasing a loss to shelter non-leasing income.

As indicated in paragraph 5 of IT-443, Leasing Property - Capital Cost Allowance Restrictions, the restriction in Regulation 1100(15) does not apply to individual classes of leasing properties if a taxpayer has more than one class, but to the total CCA that may be claimed against all the leasing properties. In determining the maximum CCA that may be claimed on leasing properties, the taxpayer is required to compute separately the aggregate of his income and the aggregate of his losses for the year from renting, leasing or earning royalties from leasing properties and properties that would be leasing properties and properties were it not for Regulations 1100(18) to (20). Such aggregates are computed without regard to paragraph 20(1)(a) so that any recapture of CCA from such properties is included but terminal losses are excluded. The maximum CCA that may be claimed on all the leasing properties cannot exceed the amount by which the aggregate of such income exceeds the aggregate of such losses. Therefore, the net rental income from the terminals can be offset by the net rental loss from the trucks as long as the maximum CCA claimed on all leasing properties does not exceed the amount by which the aggregate of such income exceeds the aggregate of such losses.

Subsection 1100(15) does not apply, by virtue of subsection 1100(16), to a corporation whose principal business is renting or leasing of leasing property including property that would be leasing property were it not excluded under subsections 1100(18), (19) or (20), or the renting or leasing of such property combined with the sale and service of property of the same general type and description, if the corporation's gross revenue from such principal business was not less than 90% of the corporation's gross revenue from all sources. The term "gross revenue" is defined in subsection 248(1) of the Act. A corporation or each partner of a corporate partnership must meet the requirements of subsection 1100(16) for each taxation year in respect of which it claims to be exempted from the CCA limitation. Whether the revenues from specific activities of a corporation can be considered part of gross revenues from the principal business of leasing for a particular taxation year in respect of which the corporation claims to be exempted from the CCA limitation is a question of fact.

The term "leasing property" is defined in subsection 1100(17). Leasing property of a taxpayer is depreciable property of a prescribed class other than the specific exclusions set out in subsection 1100(17). The depreciable property must be used principally for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue. Leasing property does not include a property leased in the ordinary course of selling goods or rendering services under an agreement by which the lessee undertakes to use the property to carry on the business of selling or promoting the sale of the taxpayer's goods or services.

The word "principally" in the definition of leasing property in subsection 1100(17) means "primarily" or "chiefly." In establishing whether a depreciable property is used principally for a given purpose, the determining factor is the proportion of time that the property is used for that purpose. Property used more than 50% of the time for the purpose of gaining or producing gross revenue that is rent, royalty or leasing revenue is considered to be used principally for that purpose.

In the above-mentioned scenario, taxpayers A, H, and C's relationship to one another is non-arm's length. Subsection 1100(19) provides that a property acquired by a taxpayer from a person with whom the taxpayer was not dealing at arm's length at the time the property was acquired is deemed not to be leasing property, if it was not leasing property of the transferee immediately before it was acquired by the taxpayer. If H and C acquired property from A and were not dealing at arm's length with A at the time of acquisition of such property, and the property was not leasing property immediately before the acquisition, then the property would be deemed not to be leasing property.

It is our view that the word "income" in paragraph 1100(15)(a)(i) means net income and not gross income. Paragraph 1100(15)(b)(i) uses the term "loss" and therefore, when viewing this in context with the use of "income" in paragraph 1100(15)(a)(i), in our opinion, the better view is that for purposes of subsection 1100(15) of the Regulations, "income" means net income.

We trust that these comments will be of assistance.

Yours truly,

Steve Tevlin
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch