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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Does the collection and deposit of rental cheques by a parent on behalf of a trust owning rental property result in the income earned in the trust being "split income"?
Position: While it is question of fact whether the parent is carrying on a business, in the situation described it is unlikely that the income earned in the trust would be "split income".
Reasons: The collection and deposit of rent cheques does not, in and of itself, result in a parent carrying on a business.
Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2003-004449
December 17, 2003
Dear XXXXXXXXXX:
Re: Section 120.4, Split income
We are writing in response to your letter dated October 9, 2003, wherein you requested our opinion on the application of section 120.4 of the Income Tax Act (the "Act") to a trust that owns real property. Your letter describes a situation whereby the trust leases the property, on a net-net basis, to arm's length tenants, earning income from property. The trust's beneficiaries are children under the age of 18. A parent collects and deposits the rental income and earns a fee from the trust for providing such services. You have asked us whether the property income earned in the trust and allocated to the beneficiaries would be "split income" as defined in subsection 120.4(1) of the Act.
Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transaction(s) are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Notwithstanding the foregoing, we are prepared to provide the following comments.
In general terms, "split income" includes, among other things, income allocated to a child by a trust or partnership, where that income is derived by the trust or partnership from the provision of goods or services to, or in support of, a business being carried on by a person related to the child, a corporation in which a person related to the child is a specified shareholder, or a professional corporation where a person related to the child is a shareholder. Moreover, to be considered "split income", there must be a link between the income earned and allocated by the trust or partnership to the beneficiaries, and the business carried on by the related person.
Under legislative proposals introduced on December 20, 2002, the definition of "split income" is modified for fiscal periods and taxation years that begin after this date, to replace the phrase "goods or services" with the phrase "property or services". This ensures that the split income rules will apply to income from property such as rental income.
In order to be considered "split income" in the scenario presented, the rental income earned by the trust must be derived from property provided to, or in support of, a business carried on by the parent. While the determination of whether the parent is carrying on a business can only be made after analyzing all of the facts and circumstances, it is our view that the collection and deposit of rents by the parent for a fee, as described in your letter, would not, in and of itself, result in the parent being considered as carrying on a business. Accordingly, the rental income earned by the trust would not likely be considered split income. However, if it is determined that the parent is carrying on a property management business that includes the collection and deposit of rents, and the trust earns income from property or services provided to or in support of this business, it is our view that such income would be considered split income.
We trust our comments will be of some assistance.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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