Meaning of the Second Part of the Definition of Business and Whether it Applies to Activities Regardless of Whether There is an Expectation of Profit

Please note that the following Policy Statement, although correct at the time of issue, may not have been updated to reflect any subsequent legislative changes.

GST/HST policy statement P-205R

Date of Issue

June 5, 1995

Revised September 1, 1998

Subject

Meaning of the Second Part of the Definition of "Business" and Whether it Applies to Activities Regardless of Whether There is an Expectation of Profit.

Legislative Reference(s)

Subsection 123(1) - definition of "business"

National Coding System File Number(s)

11635-3; 11635-9; 11950-1

Effective Date

January 1, 1991 for GST; April, 1997 for HST

Text

Issue and Decision:

The second part of the definition of the term "business" in subsection 123(1) includes four elements, all of which must be met for a person to be considered to be carrying on a business. Under this definition:

The principal objective of the second part of the definition of business is to include in the meaning of business certain activities involving the lease or rental of property that would, for income tax purposes, be considered as generating income from a property rather than income from a business. The issue considered in this policy statement is whether a person is considered to be engaged in a business where all of the requirements of the second part of the definition of business have been met (i.e., "any activity engaged in on a regular or continuous basis that involves the supply of property by way of lease, license or similar arrangement"), but there may not be an expectation of profit by the person engaged in the activity.

It should be noted that this issue is separate from the question of whether an individual, a personal trust or a partnership, composed solely of individuals is engaged in a commercial activity when leasing personal property without a reasonable expectation of profit. In the absence of a reasonable expectation of profit, such an activity does not constitute a commercial activity for purposes of the definition of "commercial activity" in subsection 123(1). Paragraph (a) of the definition requires that a business carried on by an individual, a personal trust or a partnership, composed solely of individuals, be carried on with a reasonable expectation of profit to qualify as a commercial activity of an individual, a personal trust or a partnership composed solely of individuals.

It should also be emphasized that the question is not whether taxable supplies of real property by way of lease, licence or similar arrangement made by an individual, a personal trust or a partnership composed solely of individuals without a reasonable expectation of profit are subject to GST/HST. Such activities come within the scope of the definition of "commercial activities" in subsection 123(1). As such, consideration received from the activities will be subject to GST/HST unless the person engaged in the activities is a small supplier and not registered.

It is the Department's position that a person is not required to have a reasonable expectation of profit to be considered to be in a business under the second part of the definition. A person who makes a supply (or supplies) of property by way of lease, licence or similar arrangement on a regular or continuous basis will be considered to be engaged in a "business", whether or not the activity was engaged in for profit.

As an example, this policy will be useful in determining whether the sale of real property (by an individual or a trust made up exclusively of individuals) will be an exempt supply pursuant to section 9 of Part I of Schedule V. Pursuant to paragraph 9(a) of Part I of Schedule V, such a sale is not exempt if, immediately prior to the time ownership or possession of the property is transferred to the purchaser of the property, the property was capital property used primarily in a business of the individual or trust. Note that the issue of whether the property was used primarily in a business is not dealt with in this policy statement.

In addition, this policy will also be useful in situations where persons, other than individuals, rent out property, whether real or personal, such as a non-profit organization that rents office equipment to an affiliate for a period of time for nominal or no consideration. This policy statement will be relevant in determining whether such an activity is a business for purposes of Part IX of the Excise Tax Act.

Other concepts included in the second part of the definition of business are addressed in other policy statements. They are discussed briefly hereafter.

The word "activity" has a broad meaning and can include a wide range of endeavours. Allowing another person access to one's property by way of lease or licence is in itself an activity whether the consideration is at fair market value, less than fair market value, or nil. This interpretation is consistent with the interpretation of the word "activity" found in Policy Statement P-167 Meaning of the First Part of the Definition of Business.

The activity involving the supply of property by way of lease, licence or similar arrangement must be engaged in "on a regular or continuous" basis. There are no definitive criteria in determining whether an activity is engaged in on a regular or continuous basis, or the length of the period. Each case must be considered on its own facts. The question of what constitutes regular or continuous activity is also dealt with in Policy Statement P-051 Carrying on Business in Canada.

There must be a supply of property. Reference should be made to the definition of "property" in subsection 123(1). Further, subsection 136(1) deems that "a supply, by way of lease, licence or similar arrangement, of the use or right to use real property or tangible personal property shall be a supply of real property or tangible personal property, as the case may be". Accordingly, a supply of real or tangible personal property by way of lease, licence or similar arrangement is a supply of property for purposes of the second part of the definition of business.

Finally, the supply must be by way of lease, licence or similar arrangement. Policy Statement P-062 Distinction Between Lease, Licence and Similar Arrangement in Relation to Supplies of Real Property by Public Sector Bodiesclarifies the meaning of the phrase "lease, licence or similar arrangement".

ILLUSTRATIVE EXAMPLES

EXAMPLE NO. 1

1. A woman owns farmland.

2. The woman no longer uses the farmland in the course of farming activities.

3. The woman permits her son to graze his cattle on her land.

4. The arrangement is for an indefinite period terminating if and when the land is sold.

5. The son pays his mother an amount equivalent to the property taxes on the land in exchange for permission to graze his cattle.

6. The woman does not make a profit on the arrangement.

Issue

Does the letting of the land by the woman constitute a "business" within the meaning of subsection 123(1) of the Excise Tax Actgiven that she does not seem to have a reasonable expectation of profit?

Analysis and Conclusion

The letting of the land by the woman constitutes a business for purposes of subsection 123(1) of the Excise Tax Act. Pursuant to the second part of the definition of business, it is not necessary that a person have a reasonable expectation of profit to be engaged in a business.

EXAMPLE NO. 2

1. A hobby farmer owns a 200 acre property.

2. A neighboring farmer carries on a farming business.

3. The hobby farmer permits his neighboring farmer to use 10 acres to grow hay.

4. The neighbour pays a fee of $100 per year to use the hobby farmer's land.

5. The arrangement has continued for a number of years and there is no intention to end it.

6. The hobby farmer does not make a profit on the arrangement.

Issue

Does the letting of the 10 acres constitute a business on the part of the hobby farmer?

Analysis and Conclusion

The letting of the 10 acres constitutes a business for purposes of subsection 123(1) of the Excise Tax Act. Pursuant to the second part of the definition of business, it is not necessary to have a reasonable expectation of profit to be engaged in a business.

EXAMPLE NO. 3

1. A NPO owns a building in which it has its offices and which contains a number of meeting rooms that the NPO uses only during the day.

2. Substantially all of the supplies of property or service by the NPO are made for no consideration.

3. The NPO regularly rents out meeting rooms at night to other NPOs.

4. The value of the consideration charged by the NPO for renting out the meeting rooms does not exceed the direct cost of the supply of the property by the NPO.

Issue

Does the rental of the space by the NPO constitute a business?

Analysis and Conclusion

The rental of meeting rooms by the NPO to the other NPOs constitutes a business for purposes of subsection 123(1) of the Excise Tax Act. Under the second part of the definition of business, it is not necessary to have a reasonable expectation of profit to be engaged in a business.

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