26 May 1998 External T.I. 9805165 - TIMESHARE - RENTAL INCOME

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 Issues:

Up-front payment under a timeshare agreement and other rental expenses.

Position:

1) The cost of the timeshare may be a deductible expense in the year incurred or when the services/goods/asset to which it relates are consumed;

2) interest on monies borrowed to purchase the timeshare may be a deductible expense.

Reasons:

1) If laid out to earn income from property, all or a portion is deductible (i) when the amount should be recognized for purposes of calculating “profit” - 9 and 18(1)(a), (ii) when associated with the related services in accordance with 18(9), or (iii) as capital cost allowance if it is a capital cost of a depreciable property - 9 and 18(1)(b) and 20(1)(a) and Class 1 of Schedule II.

2) Interest on borrowed monies is deductible to the extent permitted by 20(1)(c).

		980516
XXXXXXXXXX 	N. Mondou, M.Fisc.
(613) 957-8961

May 26, 1998

Dear Sir:

Re: Timeshare Investment

This is in reply to your letter dated February 11, 1998, in which you requested our comments with respect to an investment in a timeshare unit.

The situation outlined in your letter involves an actual fact situation. To the extent that it relates to a past transaction you should contact the appropriate tax services office, since the review of such transactions falls within their responsibility. However, we offer the following general comments.

As a general rule, reasonable expenses incurred by a taxpayer to earn income from a business or from property, are deductible unless the taxpayer does not have an expectation of profit, or the expense is incurred on account of capital. In this latter case however, provided the capital property is depreciable property, capital cost allowance can be claimed as an expense.

Where an amount is paid up-front in respect of an investment in a timeshare, the tax consequences will depend on whether the payment is in consideration for leasing or for purchasing an interest in the real property.

In the case of a lease, if the payment is prepaid rent, the amount would be deductible over the period of the lease as provided for in subsection 18(9) of the Income Tax Act ( the “Act”).

On the other hand, where the up-front payment is consideration for the purchase of an interest in the property, the cost of this property would be included in Class 1 and capital cost allowance could be deducted over time.

Whether the up-front payment is consideration for a lease as opposed to a purchase of an interest in the property is a question that will have to be determined after a careful review of the documentation and circumstances surrounding the payment.

With respect to the interest paid on money borrowed to make an investment, the Act provides that a deduction may be claimed where the amount is paid or payable in respect of the year, pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property.

Whether you will be earning income from property or carrying on a business is a question of fact. We are enclosing a copy of Interpretation Bulletin IT-434R (“Rental of real property by individual”) which will provide you with more details in this respect as well as some guidance with respect to the different treatment accorded to expenses.

Finally, the form that is to be used to report rental income is Form T776 (“Statement of Real Estate Rentals”). You can obtain a copy of this form and the related guide (T4036) from your tax services office.

We trust that these comments are of assistance but caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transactions.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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