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.
Principal Issues: Whether the income from a rental activity is considered business income or income from property.
Position: General comments.
Reasons: It is a question of fact which depends on the circumstances.
XXXXXXXXXX
2010-038515
Kathryn McCarthy, CA
(613) 828-9377
December 20, 2010
Dear XXXXXXXXXX :
Re: Business or Property Income
This is in response to your e-mail of October 27, 2010, concerning the above noted subject, and further to a telephone conversation on November 15, 2010 (McCarthy/XXXXXXXXXX ).
You indicated that you carry on XXXXXXXXXX farming business and borrowed money to purchase a second property in order to create a XXXXXXXXXX farm. The residence on the second property is rented to your XXXXXXXXXX 's family at a reduced rate. Your XXXXXXXXXX is your farm employee. You borrowed again to add another bedroom and bathroom to the residence.
Unfortunately, the region was flooded and your farming business damaged. Floodwater filled the rental residence up to 4 feet. The wall coverings, insulation, cupboards, fixtures and flooring were all removed. Your tenant had to find other accommodation.
You applied to a provincial disaster financial assistance program for aid using a copy of your income tax return, which reported the rental income separately from the farming income. The program's provincial authority has ruled that the rental activity is separate from your farming business and has refused your claim for assistance for repairs to the rental residence. You intend to appeal the ruling.
Your accountant subsequently filed a T1 Adjustment Request with the Canada Revenue Agency ("CRA") to amend your income tax return to report the rental income as part of the farming income. The CRA has yet to notify you whether your income tax return will be reassessed to treat the rental income as part of the farming income.
You advised that the rental income is deposited into (and all expenses with respect to the rental are paid out of) your farming business account. Payments for loans on the rental property are made out of your farming business account and are regarded by the lending institutions as farming expenses. Your accounting software and financial statements include the rental income with your farming income.
You enquired whether the income from the rental of the residence can be characterized as farming income under the Income Tax Act ("the Act").
Our Comments
The situation outlined in your letter relates to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other CRA publications can be accessed on the Internet at www.cra-arc.gc.ca. Since the situation involves a specific taxpayer and past rental activities, you should submit all relevant facts and documentation to the local Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following comments, which may be of assistance.
Pursuant to the definition of "farming" in subsection 248(1) of the Act, farming includes tillage of the soil, livestock raising or exhibiting, maintaining of horses for racing, raising poultry, fur farming, dairy farming, fruit growing and the keeping of bees. However, it does not include an office or employment under a person engaged in the business of farming.
The CRA will generally consider income from a certain activity that, by itself would be a non-farming activity, to be income from a farming business if the activity is incidental to the taxpayer's farming operations and the income generated by the activity is not substantial in relation to the taxpayer's farming revenue. The expression "incidental" implies a subordinate relationship or "having a minor role in relation to". Factors that may be relevant in the determination of whether a particular activity is incidental to another would include the income generated and the capital or labour invested in the activity.
Farming income does not normally include rental income, unless the rental activity is incidental to other activities that qualify as farming. In determining whether the revenue from the rental of real property gives rise to income from a business of farming or from property, other factors may have to be considered such as whether the rental is on an ongoing basis and whether the farming operation to which the rental relates is discontinued, or simply temporarily suspended. For example, an individual may rent out, for one crop season, a barn previously used by the individual in farming pending the resumption of farming operations by the individual. If the individual subsequently uses the barn in farming, it would not necessarily be correct in all cases to conclude that the rental revenue is not farming income, without further investigation of the circumstances leading to the temporary rental of the barn.
To determine the actual treatment of the rental income by the CRA in your case, you may wish to contact the Taxation Centre ("TC") indicated on your Notice of Assessment, particularly since your accountant appears to have filed a T1 Adjustment Request to include the rental income as part of the farming income. You may enquire of the TC to determine whether there will be a reassessment, as requested.
Please be advised that our general comments are only in respect of the treatment of rental income under the Income Tax Act and may or may not apply to the provincial disaster financial assistance program rules. For further assistance, you may wish to contact the provincial program authority.
We trust the foregoing comments are of assistance.
Yours truly,
S. Parnanzone
Manager
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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