Let’s say that a person owns a rental property and also a company.

Can the company charge the rental as if it were the owner and be taxed on the net rental income rather than the owner being taxed?

The answer lies in one of the anti-avoidance sections in the Income Tax Act.

s7(7) is a difficult read because of the clutter, so I have simply deleted the words which are not relevant to this example, but have not changed any of the words.

S7(7) If by reason of any donation, settlement or other disposition made by any person (hereinafter referred to as the donor)—

    (a) the donor’s right to receive any amount by way of rent in respect of any immovable property is made over to any other person or to a third party for that other person’s benefit in such manner that the donor remains the owner of the said property;

any such rent as is received by the said other person and which would otherwise, but for the said donation, settlement or other disposition, have been received by the donor, shall be deemed to have been received by the donor.

So, there it is. If the donating person owns the property, the net rental is taxed in that person’s hands.

Note that s7(7) refers to a person and not to a company. It was only after publishing this article that I discovered the Interpretation Act of 1957. It deals with the interpretation of certain words for legal puposes and applies to all Acts past, present and future. It states quite clearly that the word person includes a company.

And we also read s80A Impermissible tax avoidance arrangements.—An avoidance arrangement is an impermissible avoidance arrangement if its sole or main purpose was to obtain a tax benefit and—

(c) in any context—

(i) it has created rights or obligations that would not normally be created between persons dealing at arm’s length.

So there you have it. This arrangement would not “normally be created between persons dealing at arm’s length”, so, even without s7(7), it would be disallowed if there was a tax benefit.

Why the Income Tax Act has to scatter anti-avoidance provisions in s7, s80A and s103 instead of in one place, I fail to understand.