Interest Limitation & Boarding Houses

The Interest limitation will apply to a boarding house unless it qualifies as a boarding establishment for the purposes of Excepted Residential Land. It is important to note that a boarding establishment is different to a boarding house. A Boarding Establishment is defined as premises that:

Are used for the business of supplying accommodation
Are managed by the business
Consist of at least 10 boarding rooms that are not self-contained, and
Include shared living facilities

All of the above need to be satisfied in order for the property to be considered a boarding establishment. The term premises refers to a single site location.

As an example, if there are 4 houses on different pieces of land, even if adjacent, and each has 4 rooms, the properties will not qualify as a boarding establishment. If all 4 houses were on the same parcel of land, then the single site location will be satisfied.

A taxpayer may operate several establishments at different locations. Each location must satisfy the “Boarding Establishment criteria” i.e. to have at least 10 boarding rooms, before the new interest limitation rules will not apply.

The difference between a boarding house and boarding establishment is that a boarding house can easily be converted to an owner-occupied property or a long-term residential rental. The purpose of the new interest limitation rules is to limit interest deduction on these types of properties.

July 2022