2020-0837611C6 STEP 2020 – Q7 - TOSI and Rental Property

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 rental income and capital gains from real property held directly by related individuals (other than trusts) in a co-tenancy would be subject to TOSI.

Position: No.

Reasons: Based on the definition of “split income” in 120.4(1).

Author: Witteveen, Tobias

Section: 120.4(1)

2020 STEP CRA Roundtable – November 26, 2020

QUESTION 7. TOSI and Rental Income

A number of related people hold a co-tenancy interest in a rental property.  Assume that the rental activities do not amount to a partnership.  Can CRA confirm that in these circumstances the rental income will not be split income for purposes of the TOSI rules?

Similarly, when the property is sold, can CRA confirm that any resulting taxable capital gain will not be split income?

For the purposes of this question it is assumed that the people who hold the co-tenancy in the rental property are individuals (other than trusts).

CRA Response

The tax on split income in section 120.4 of the Income Tax Act (the “Act”) only applies to “split income” of a “specified individual” for a taxation year pursuant to subsection 120.4(2) of the Act. “Split income” and “specified individual” are defined for this purpose in subsection 120.4(1) of the Act.

A “specified individual” is generally defined as an individual, other than a trust, who is resident in Canada at the end of the year, and if the individual is under 18 years of age at the end of the year, the individual has a parent that is resident in Canada at any time in the year.

Split income of a specified individual for a taxation year is defined as the total of all amounts listed under paragraphs (a) to (e) of the definition of “split income” in subsection 120.4(1), other than excluded amounts.  Generally split income is defined to include amounts that are included in a specified individual’s income in respect of a corporation, partnership or a trust.  The definition “split income”, however, does not include amounts that are included in the income of a specified individual as a result of the direct ownership of real property.

Therefore, assuming the people holding the co-tenancy in the real property are individuals (other than trusts), and that the rental activities do not amount to a partnership, the rental income earned and the taxable capital gain realized on the real property will not be subject to the tax on split income.

 

Tobias Witteveen
2020-083761

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2020

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2020


Monthly Tax Update

For additional commentary on Technical Interpretations, court cases, government releases, and conference materials in a single practical document specifically geared toward owner-managed businesses, see Video Tax News Monthly Tax Update newsletter.

This effective summary and flagging tool is the most efficient way to ensure that you, your firm, and clients are fully supported and armed for whatever challenges are thrown your way.

Packages start at $399/year.

Learn More