Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Is an amount paid to Company A from Company B to give up its share of office space under a co-tenancy received by Company A on account of income or capital for income tax purposes? If the amount is a capital receipt, is it taxed as a capital gain or a disposition of eligible capital property?
Position: It is likely received on account of capital and treated as a capital gain.
Reasons: The amount is a capital receipt received as replacement for the loss of a capital asset (a leasehold interest).
XXXXXXXXXX
2012-043678
Andrea Boyle, CGA
February 7, 2013
Dear XXXXXXXXXX:
Re: Tax Treatment of Payment Received from Co-Tenant
I am writing in reply to your email dated February 14, 2012, in which you asked whether an amount paid to Company A from Company B to give up its share of office space under a co-tenancy would be considered to be received by Company A on account of income or on account of capital for income tax purposes. In addition, if the amount is considered to be a capital receipt, you asked whether the amount would be taxed as a capital gain on the disposition of a leasehold interest or as a disposition of eligible capital property.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.
A leasehold interest is the interest of a tenant in any leased tangible property. Generally speaking, a tenant who leases property acquires a leasehold interest in that property regardless of whether or not any capital cost is incurred in respect of that interest. However, a depreciable property is not considered to have been acquired until a capital cost has been incurred in respect of that property.
The disposition of a leasehold interest is discussed in Interpretation Bulletin IT-464R, Capital Cost Allowance Leasehold Interests. As per paragraph 9, a lessee is considered to have disposed of a leasehold interest at the time of an assignment of the lease or to have a partial disposition when the lease is sublet.
In Sussex Square Appartments, (99 DTC 443) the court concluded that a "sublease" of the entire term of a lease operates as an assignment, not a sublease, as there is no reversionary interest left in the original tenant. It is our view a sublease for the entire term of a lease would be a disposition, rather than a partial disposition of a property.
As per paragraph 7 of IT-359R2, Premiums and Other Amounts With Respect to Leases, an amount received by a tenant permitting the assigning of a lease is "
a capital rather than an income receipt to the recipient. The tenant is considered to have relinquished a right or rights in respect of a leasehold interest, and thus such an amount represents proceeds of disposition of part or all of the leasehold interest."
However, it should be noted that this capital treatment does not apply to an amount received on granting a sublease that is in lieu of a payment of rent or is a prepayment of rent from the subtenant. Such amount is treated as rental income received "
to the extent that it can reasonably be regarded as such." Also, if renting property forms part of a business carried on by the tenant, an amount received by a tenant as consideration for cancelling a lease or sublease, is business income.
In the situation described it appears that the sublease is for the entire term of a lease. Additionally the amount received does not appear to be a payment in lieu of rent or a prepayment of rent since, under the arrangement described, Company B is responsible for paying the entire rent and associated costs related to the leased space in addition to making this payment to Company A.
Therefore, assuming that renting property does not form part of the business carried on by Company A, the amount received by Company A would be proceeds of disposition from the sale of a leasehold interest which would be on account of capital for income tax purposes. Assuming that the balance or the undepreciated capital cost in class 13 is nil at the time of the disposition, the payment would be taxed as a capital gain not a disposition of eligible capital property.
We trust that these comments will be of assistance.
Yours truly,
Doug Watson
for Director
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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