28 January 1998 External T.I. 9800015 - "RENTAL PROPERTY' DEFINED IN 1100(14)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

PRINCIPAL ISSUE:

1) Whether lessor of building owns “rental property” where lessee is a corporation associated with the lessor and lessee carries on business of operating a hotel (i.e., the rent it pays lessor is deemed to be income to the lessor from an active business pursuant to 129(6));

2) if lessor owns “rental property”, is it exempt from Reg. 1100(11) restrictions because it satisfies “principal business” test in Reg. 1100(12).

Position:

1) Associated status and deeming effect of 129(6) irrelevant to issue of whether lessor is subject to Reg. 1100(11);

2) refer to 1100(14), etc. and if it is determined that taxpayer owns “rental property”, 1100(11) applies unless taxpayer exempt under 1100(12).

Reasons:

1) Associated corporations provisions are not made relevant for purposes of 20(1)(a) of Act and Part XI of the Regulations;

2) question of fact whether lessor owns rental property but has as a principal business the rental or leasing of real property owned by it.

XXXXXXXXXX

Attention: XXXXXXXXXX

January 28, 1998

980001
P. Spice

Re: Definition of “Rental Property” in
Subsection 1100(14) of the Income Tax Regulations

This is in reply to your fax of December 24, 1997, in which you ask for our interpretation of the inter-relationship between the rules restricting capital cost allowance (“CCA”) taken with respect to “rental property” and subsection 129(6) of the Income Tax Act (the “Act”) which deems certain income from property to be income from an active business for purposes of that subsection and section 125 of the Act.

In our opinion the effect of subsection 129(6) of the Act is restricted as explicitly set out therein; the issue of whether a taxpayer owns a “rental property” and is subject to the CCA restrictions in subsection 1100(11) of the Income Tax Regulations (the “Regulations”) must be resolved by reference to the words in subsection 1100(14) and such related provisions as subsections 1100(14.1) and (4.2) of the Regulations.

With respect to your specific scenario, we are unable to confirm whether a particular corporate taxpayer owns a “rental property”. General guidelines are contained in various publications, including IT-195R4 (“Rental Property - Capital Cost Allowance Restrictions”) , IT-274R (Rental Properties - Capital Cost of $50,000 or More”), IT-371 (“Rental Property - Meaning of ‘Principal Business’”) and IT-285R2 (“capital Cost Allowance - General Comments”). If it is determined that a corporate taxpayer owns a “rental property”, the test in subsection 1100(12) of the Regulations may be applied to determine whether the taxpayer is exempt from subsection 1100(11) of the Regulations.

If a taxpayer owns a rental property, either subsection 1101(1ac) or (1ae) of the Regulations may apply if the taxpayer owns another property which is described in the same class in Schedule II of the Regulations as is the rental property. Note that subsection 1101(1ac) only applies to a rental property which, among other things, has a capital cost to the taxpayer of not less than $50,000. Generally, subsection 1101(1ae) of the Regulations applies to a rental property with a capital cost of less than $50,000 but will not apply to a taxpayer corporation described in subsection 1100(12) of the Regulations. Where either subsection(1ac) or (1ae) apply the effect is to cause a separate class to be prescribed for the rental property. Thus, on disposition of the rental property there will be no deferral of recognition of the recapture or the terminal loss.

Although the foregoing comments are not binding on the Department, we trust they assist.

Yours truly,

for Director
Financial Industries Division