ABI or rental income?

T2
1

Hi, have a new client operate a spa/salon, then owner also rented out part of her space to another person, say Ms. X.

My questions are:

  1. If Ms. X rent the space from the owner on usage (eg, every time Ms. X has a client, go in and use the space, and pay the owner $y. Just like a ‘commission’ the owner charge Ms. X. Will this consider rental income or ABI?

  2. If Ms. X rent the space on a monthly basis, I believe this should be rental income?

Thanks,

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  1. The first step I would take its to get a copy of the executed lease agreement for my files.
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  2. The second step I would take is very carefully read the entire lease, noting that it was drawn with a lawyers assistance, and make notes as to legal definitions, and to legal rights, duties, and obligations thereunder. Particularly looking for legal definitions of “base rent” and “additional rent” in the contract.
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  3. The third step I would take is to examine the money flow of this property income, and see whether reality conforms to the substance of the lease.
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3

In these types of situations, the business is too small to justify the lawyer (or so the thinking goes and it never happens.) The chair rental is typically not treated as rent. In fact her lease would probably forbid a partial sub lease. In some salons the chair may be rented by more than one other person on different days. I treated the chair rental as such - chair rental income. (Sorry, Joe - out here we do what we can.)

4

@obhorst
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“In these types of situations, the business is too small to justify the lawyer (or so the thinking goes and it never happens.) The chair rental is typically not treated as rent. In fact her lease would probably forbid a partial sub lease. In some salons the chair may be rented by more than one other person on different days. I treated the chair rental as such - chair rental income.”
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So your post says it is a Schrödinger’s Rental …

“The chair rental is typically not treated as rent.” AND
“I treated the chair rental as such - chair rental income”
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Perhaps it then must be taxed according to Schrödinger’s Income Tax Act

5

I guess, because you are usually correct. :grinning: I will have to look that up tomorrow. What I was trying to say, is that I would record the chair rental income on a business statement, not on a rental statement. Not sure if that is still Schrodinger’s or not. And I don’t have a quick way of adding the umlauts on the o.

6

For your quicker reference: :books: :smile: :fast_forward:
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" I will have to look that up tomorrow."
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https://en.wikipedia.org/wiki/Schrödinger’s_cat#:~:text=Schrödinger’s%20cat%20is%20a%20thought,mechanics%20applied%20to%20everyday%20objects.
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“And I don’t have a quick way of adding the umlauts on the o.”
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Alt-numpad 153 = Ö
Alt-numpad 148 = ö
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It can be said that “Rent” is the income from the “use of property” .
I would be hesitant in labeling “income from property” to be something else, pending further investigation and more facts…

7

In similar situations, my practice has been based on materiality and practicality:

  • generally such arrangements are incidental income - they are not material and are simply an attempt to defray the cost of some portion of the space
  • where the business of the lead org is only rental, the nature of it is clearly distinguished from the above
  • most situations fall somewhere in between – a group has space, lets various people use a portion of it - not as a formal sublease, but on a per-use rental basis (more often than not, though, they simply take a % of the income in lieu of rent); where the “rental” exceeds other income it’s distinguishable, but where it is only a portion of overall income, I generally treat it as incidental income - much like incidental investment revenue.

And, for what it’s worth, most of the “rental agreements” (when they exist!) aren’t worth the paper they’re written on … frequently copied from someone else’s version, edited (badly) and often misstate most of what actually can, and can’t be done. Small biz often doesn’t want to waste money on lawyers. Sometimes this could be to their detriment…

8

“take a % of the income in lieu of rent”
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Generally in Canada, a proper lease agreement (drafted not by DIY-ers), would typically define “take a % of the income” in the contract as “additional rent”.
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Whatever the situation, I would not in any event be basing tax preparation solely on verbal assertions of the various parties…
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Possibly you may recall the first task given to every first year articled clerk?..

  • “Go to XYZ Ltd and bring me back a copy of the verbal agreement form for my file”… :grinning:
9

Hear, Hear! Thanks, you said what I wanted to say.

10

Don’t disagree for the “properly drafted” part…it’s just that so many smaller businesses can’t afford to spend thousands on a lawyer, or can, but simply think they can use an existing one and “modify it themselves”.

And, at least in my practice over the past forty years, I’ve dealt with WAY too many oral agreements between parties. Legal, notwithstanding that they’re oral, but impossible to validate unless there are third-party witnesses. And, of course, oral agreements generally end up in misery for one or both parties.

I’d almost prefer those to the DIY ones that make a complete hash of the law, be it commercial or more usually,“contractor status” employment (“you are not an employee, but you’ll do everything on my schedule, my way, using my space and tools and I’ll give you some payment”). Oof. How many different federal and provincial laws can we transgress in one agreement?

Back to the original point: sadly, too many arrangements are made in small biz without professional guidance, and that is actually the root cause of most of these issues, giving us grey hairs because somehow WE have to make a decision like the one the OP faces.

11

Thank you. It make sense.