30 November 1990 Administrative Letter 901546 F - Leasing of Houseboat

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.

November 30, 1990

Dear  19(1)

Re:  24 (1)

We are writing in reply to your letter of June 30, 1990, wherein you requested our comments on various alternative arrangements for owning a houseboat which you    24(1)  The houseboat is a certified vessel pursuant to subsection 1101(2a) of the Income Tax Regulations (the "Regulations") and the applicable capital cost allowance ("CCA") rate is determined by paragraph 1100(1)(v) of the Regulations. We apologize for the delay in responding to your letter.

Your Questions

1)     For income tax purposes can I lease the houseboat as a sole proprietor or do I require a general partner?

2)     Can I lease the houseboat as a sole proprietor even if the vessel is used in a time sharing arrangement?

Our Comments

A)     Types of Entities Available

     Although the income tax implications will vary depending on the entity chosen to carry on a business or rent or lease a property, a taxpayer is free to choose the type of business arrangement, such as a sole proprietor, a partnership or a corporation, that is most suitable under the circumstances. As we are unable to provide a recommendation as to the arrangement for carrying on a business or renting a property that is most suitable for a particular taxpayer, you may wish to obtain accounting or legal advise on this matter, You may also wish to discuss at the same time the impact to you of the specific income tax laws dealing with the transfer of property from a partnership to a partner and the disposition of a partnership interest.

     For your information, in order for an individual to be a partner in a partnership, there must be two or more persons carrying on a business in common with the expectation of earning a profit. The relevant provincial partnership law will generally determine whether an arrangement is a partnership.

B)        Income Tax Implications

     While we are unable to provide a discussion on all of the income tax implications of renting a houseboat, we can provide a few general comments on this subject as indicated below.

     Regardless of the business arrangement chosen, in order for the expenses of the activity and CCA in respect of the property to be deductible for income tax purposes, the activity undertaken must have a reasonable expectation of profit.

     The rental of a houseboat may result in business income or property income, depending on the facts of a particular situation. The renting of a houseboat to others by an individual will generally be regarded as a business operation only where services are made available to the renters to such an extent that the rental operation has gone beyond the mere rental of the property. It is the number and kinds of services supplied that will determine whether a particular rental operation constitutes the carrying on of a business and hence generates business income from that operation. Even though two or more individuals carry on a rental operation in what appears to be a partnership, that partnership in itself does not justify an assumption that the operation must therefore produce business income as opposed to property income. The service test referred to above must still be met. Where a corporation was incorporated to earn income by carrying on a business, there is a general presumption that profits arising from its activities are derived from a business.

       However, in some circumstances, a corporation's entire profits can be characterized as income from property where a corporation is formed for the sole purpose of holding property to be rented and assumes only limited responsibilities in respect of that property. The determination as to whether an entity is carrying on a business is relevant for the purposes of determining if that entity can qualify for one of the exceptions to the CCA restriction discussed below.

     Regardless of whether the renting of a property results in business income or property income, a taxpayer will be considered to have a "leasing property" and be restricted to the amount of CCA that may be claimed on that property, unless one of the exceptions noted below are met. Where a taxpayer has a "leasing property", he can not claim CCA, even though it is otherwise available, that creates or increases a loss from that property. As a result, a taxpayer is unable to reduce income from other sources by a loss from a "leasing property" created by a CCA claim. In general, a "leasing property" is a property that is used by a taxpayer more than 50 per cent of the time for the purposes of producing gross revenue that is rent, royalty or leasing revenue. Except as noted in the following paragraph, rental revenue includes revenue derived from the right to use or occupy property as well as ancillary services offered along with that right. Therefore, revenue derived from the chartering of a houseboat without a crew would normally be considered as rental or leasing revenue regardless of the other ancillary services provided as part of the charter arrangement or small fees collected therefrom.

     However, revenue received from providing ancillary services will not be treated as rental income for the purposes of the 50% test above if the entity renting the houseboat provides sufficient services such that it is considered to be carrying on a business add it also meets one of the requirements outlined below:

a)     an individual operates a sole proprietorship and be is personally active on a continuous basis in the day to day operation of the business throughout the portion of the year during which the business is ordinarily carried on;

b)     the business is carried on by individuals in a partnership and the partners who are personally active in the business on a continuous basis are entitled to share in at least two-thirds of the income or loss of the partnership; or

c)     the business is carried on by a corporation.

It is difficult to envisage a situation where an individual renting a houseboat as either 1) a sole proprietor or 2) a member of a partnership would be active on a continuous basis in the operation of that business, and hence qualify for the exception noted in a) or b) above.

The revenue derived from the chartering of a houseboat under a charter which consists of the provision of a fully-crewed houseboat (i.e. an "all-inclusive charter" in which the charterer supplies the houseboat, fuel, captain. crew, food, other necessities and related services) would not normally be regarded as rent, royalty or leasing revenue but instead would be regarded as income from carrying on a business. Accordingly, if in a particular taxation year the houseboat is used for providing "all-inclusive charters" more than 50 per cent of the time, the houseboat would not constitute a "leasing property" and the CCA otherwise available could be claimed.

In addition, if a corporation's principal business throughout the year was the renting or leasing of property and its gross revenue from such principal business was not less than 90 per cent of the gross revenue of the corporation from all sources, it would not be subject to the restriction on the CCA claim that exists for a "leasing property".

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70- 6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.

We trust these comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch