28 September 1989 Internal T.I. 58537 F - Use or Maintenance of a Yacht Used in a Rental Operation

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.

September 28, 1989

We are writing in reply to your letter of August 16, 1989, wherein you requested out views as to whether or not expenses incurred for the use or maintenance of a yacht used in a rental operation would be denied by virtue of paragraph 18(1)(1) of the income Tax Act.

Our understanding of the situation and your views on the probable income tax consequences is as follows:

The expenditures in question would include operating expenses such as fuel, insurance, repairs and maintenance, etc.  It is assumed that there is a reasonable expectation of profit form this rental operation.  Paragraph 18(1)(1) denies a deduction "for the use or maintenance of property that is a yacht ... unless the taxpayer made or incurred the outlay or expense in the ordinary course of his business of providing the property for hire or reward".  The question arises as to whether this paragraph would deny a deduction for maintenance expenses where a yacht is used in the course of a rental operation (i.e. earning property income) as opposed to a business operation (i.e. earning active business income).

A strict interpretation of this paragraph would, in your view, appear to deny the deduction for such maintenance expenses since a rental operation may not necessarily constitute a business.  In addition. Regulation 1102(1)(f) would deny the claim for capital cost allowance if paragraph 18(1)(1) applies.  However, such an interpretation would appear to provide an inequitable result as a taxpayer would include in his income gross rental receipts but would be denied a deduction for operating expenses.

Our Comments

The Department's views on recreational properties and the application of paragraph 18(!)(1) are set out in IT-148R2.  The following extracts from paragraphs 1, 4, 6 and 7 would appear relevant to your enquiry.

     "1.  Subparagraph 18(1)(1)(i) provides that in computing a taxpayer's income form a business or property, no deduction may be made for any outlay or expense made or incurred by the taxpayer after 1971 for the use or maintenance of a yacht, ... unless the taxpayer made or incurred the outlay or expense in the ordinary course of his business of providing the property for hire or reward. ...

     4. ... It is the Department's view that paragraph 18(1)(1) would not have application to deny an outlay or expense in connection with a vessel essential to the business operations, all or substantially all the use of which is for business purposes. ...

     6.  The disallowance of outlays or expenses for the maintenance of a recreational property described in 1 above does not extend to such costs incurred by a taxpayer whose ordinary business consists of or includes the renting of that property. ...

     7.  Where the ordinary business of a taxpayer does not consist of or include the renting of the recreational property, any incidental rents that may be received therefrom may be offset against the non-allowable maintenance expenses of the property."

It is our view that he above-quoted commentary in paragraph 7 of IT-148R2 would extend to permitting an offset in a case where rents which are property income exceed non-allowable maintenance expenses.  However, we agree with your analysis of the use of the word "business" in subparagraph 18(1)(1)(i).  The effect, in our view, is to prohibit the creation of a rental loss through the deduction of non-allowable maintenance expenses.  We also agree with your view that one effect of Regulation 1102(1)(f) is to deny the deduction of CCA in the case of recreational properties used to generate property income.

We note that in any particular case, it would involve a finding of fact as to whether or not the rental of a yacht would give rise to business or property income.

We hope these comments are of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch