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