How is this usually done?.. CCPC client purchases a building to use to operate a small retail store. Office space in the same building is leased to an independent third party. The leased space is approx 27% of the whole building. How should this be recorded in Taxcycle T2? Obviously the office rental is not the main purpose of the building asset for the CCPC owner but rather the sale of retail goods from the store. Should the Class 1 building be split into 2 asset pools on the S8 to be able to claim CCA against the portion that is from the passive rental income? Or should it remain as one asset because it is in fact one building? Although then the CCA claim would not be able to be fully utilized if recorded against the rental income portion as the income is less then the full potential CCA. Thanks
Interesting question! I have a client with a similar situation - small amount of rental space in a building owned and used 90% by a law firm. They have not been claiming any CCA (on my advice) because I expect the future FMV of the building to increase, and want them to avoid recapture. And yes, I know this issue is always a hot debate among accountants.
I did some quick research online, and couldn’t find anything about the specific scenario, but I imagine it would be similar to splitting the capital cost between land and building, or allocating a portion of your principal residence as a rental to claim CCA on the rental. I’m guessing you are right about splitting it into 2 asset pools. I’d like to hear what other practitioners have to say…
I do not think there would be any need to break down the property. Where the building is utilized principally to operate an active business (retail store), and a portion of the building is rented out, the related rental income would be considered incidental to the active business, and in that case, the rental income would also be considered active business income. This logic is supported by the explanation found in Paragraph 4 of IT73R6. Link to the bulletin is below:
ARCHIVED - The Small Business Deduction - Canada.ca
Paragraph 5 of the bulletin references a court case where a business operated a motion picture theatre and rented out a portion of the building could treat the rental income as active business income. This would appear similar to the current situation.
Based on the interpretations provided by CRA, I would treat all income as active business income, and would not break down the building value. Whether or not to claim CCA would depend on your clients particular tax situation.
I like that idea, but I have experienced the opposite treatment by CRA in more recent years. Note that the article you linked was archived by CRA, last updated in 2002, and the example is a court case from 1981. Further, the theatre was only renting out parking spaces in its parking lot, when not in use for a performance.
While I worked at a large firm in 2014, there was a client that owned a bingo hall, and rented out the back (approx. 25% of the floor space) to an auto mechanic. CRA investigated and determined that the rental income was “structural” not “incidental”, mostly because the owner INTENDED to earn rental income from that space.