31 January 1984 Income Tax Severed Letter A-9247 - [840131]

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.

A-9247 C. Englehart

January 31, 1984

Dear Sirs:

This is in reply to your letter dated December 19, 1983 wherein you request our view on the following situation:

1) A non-resident has a partnership interest in a number of real estate partnerships.

2) The real estate partnerships have income from the rental of real property which is situated in Canada.

3) Some partnerships merely collect rentals and perform no other business activity.

4) Other partnerships (through agents) collect rents and pay expenses of operation of the real property. This operation represents, in your opinion, the operation of a business activity.

5) The partnerships are located in Ontario & Quebec. The questions which require our interpretation are:

a) Can the partnership as described in point 3 be considered to be earned income from property subject to Part XIII tax opposed to business income taxable under subsection 2(3) of the Income Tax Act (the Act)?

b) Can the non-resident taxpayers file elections under subsection 216 with respect to income from partnerships described in point 3?

c) Will the income from partnerships as described in point 4 be taxable under subsection 2(3)?

d) Will the existence of the income from partnerships, as described in point 4 prevent the taxpayer from filing election under subsection 216 with respect to properties described in point 3?

Our comments are as follows:

a) It is our view that the income received by a partnership from the rental of its property constitutes property income where its only activities are related to financial matters and the protection of the partnership's investments such as:

i) negotiation of leases

ii) collection of rents

iii) payment of related mortgage obligations

iv) payment of structural repairs

v) payment of taxes and insurance on the property.

Therefore, the rental income received by a partnership in the circumstances described in no. 3 above would be subject to tax under Part XIII of the Act rather than under Part I.

b) It is our view that the non-resident member of a partnership may elect under subsection 216(1) of the Act where amounts have been paid during the taxation year to the partnership in satisfaction of rent (See paragraph 1 of IT-393R ) and the rent constitutes property income.

c) It is a question of fact whether rent constitutes business or property income. Based on our comments in a) above, and on the information at our disposal, it is our view that the rental income received by the partnership in the situation described in paragraph 4 above would not constitute business income, and would not therefore be taxable under subsection 2(3) of the Act.

d) As mentioned in paragraph 3 of IT-393R where the renting of real property by a non-resident is a business carried on in Canada by the taxpayer (partnership) the provisions of Part XIII and the alternative treatment under section 216 of the Act are not applicable. Income from a business carried on in Canada is taxed pursuant to Part I of the Act and is also subject to the relevant income taxes of any province or territory in which such business is carried on.

We would like to point out, even if the question was not raised, that where a partnership considers its rental income as business income, the Canadian payors (tenant can potentially be liable for the penalties under subsection 215(6) of the Act, unless there is a waiver under subsection 805(2) of the Income Tax Regulations, if the tenants do not withhold the Part XIII tax and it is subsequently determined that the rental income does not constitute business income to the non-resident.

We trust that the above comments will be of assistance to you.

Yours truly,

for Director Non-Corporate Rulings Division