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 ownership of furniture used to furnish rental apartment units for students is a distinct activity separate from the activity of leasing real property in contravention of the activity restriction in clause 149(1)(o.2)(ii)(A).
Position: No, provided that the furniture is ordinarily and customarily found in rental apartment units for students.
Reasons: Prior CRA positions with respect to the rental of furnished premises, and when separate activities may be viewed as an integrated whole.
Author: Koh, Kah Foo
Kah Foo Koh
September 15, 2020
Re: Pension Corporation – Renting Furnished Apartments
We are writing in response to your letter of July 8, 2020 regarding the interpretation of the activity restriction set out under clause 149(1)(o.2)(ii)(A) of the Income Tax Act (the “Act”).
Your letter presented the following fact scenario:
1. A pension corporation that is exempt from Part I tax under subparagraph 149(1)(o.2)(ii) (the “Corporation”) owns a 45% interest in a limited partnership (the “Limited Partnership”) along with third-party partners.
2. The Limited Partnership will develop a residential apartment property the units of which are largely expected to be rented to university students (the “Residence”).
3. As is customary with student housing, the Residence will contain suites that are furnished and rented to students (i.e., tenants) on fixed-term contracts. The Limited Partnership will acquire and own the furniture (the “Furniture”).
4. There will be one charge to the tenants for the occupancy of the suites on the Residence.
5. The Limited Partnership will hold no other investments.
6. The cost of the furniture is very small relative to the cost of the completed Residence. But the investment in the furniture is necessary to attract and retain prospective tenants.
7. The Residence and the Furniture are capital property to the Limited Partnership.
8. The Limited Partnership’s level of activity directed towards the rental of apartment units in the Residence will not rise to the level of carrying on an active business.
You have asked whether, in the above scenario, the Corporation may be considered to have limited its activities to those mentioned in clause 149(1)(o.2)(ii)(A).
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
In general, clause 149(1)(o.2)(ii)(A) limits the activities of a pension real estate corporation to “acquiring, holding, maintaining, improving, leasing or managing capital property that is real property or an interest in real property owned by the corporation”, and “investing its funds in a partnership that limits its activities to acquiring, holding, maintaining, improving, leasing or managing capital property that is real property or an interest in real property owned by the partnership”.
We have assumed that the Furniture in this case is ordinarily and customarily found in rental apartment units for students.
In such case, it is our view that the Limited Partnership’s proposed acquisition and ownership of the Furniture for the purpose of furnishing the rental units in the Residence would not be a distinct activity that is separate from its activity of leasing real property. Thus, the proposed ownership of the Furniture by the Limited Partnership would not, in and of itself, result in the failure of the Corporation to satisfy the activity restriction in clause 149(1)(o.2)(ii)(A).
We trust that our comments will be of assistance.
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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