18 July 2011 External T.I. 2011-0403841E5 - Triple net leases and ATR 2000-0002543

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: Has the CRA's position in 2000-0002543 changed?

Position: No. As stated in 2000-0002543, whether a private foundation entering into a triple net lease is carrying on a business is a factual determination. General comments provided.

Reasons: A determination can be made only after a review of the relevant facts, including the terms and conditions of the particular lease.

XXXXXXXXXX 							2011-040384
								Sylvie Danis
								(613) 957-3496
July 18, 2011

Dear XXXXXXXXXX :

Re: Triple Net Leases and ATR 2000-0002543

This is in response to your letter of March 10, 2011 which was forwarded to us by the Charities Directorate. You asked whether it is still our view as indicated in Rulings document E2000-0002543 that a private foundation which rents a property to a tenant on a triple net basis without providing any services beyond basic services would not be carrying on a business. You advise that your client wishes to gift an interest in a valuable building to a private foundation and that by virtue of the terms of the triple net lease to third party tenants, the only activity of the private foundation would be to receive the net rental payments from the manager of the 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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can offer the following general comments that may be of assistance.

Black's Law Dictionary (6th edition) defines a triple net lease as a lease "in which the lessee pays all the expenses including mortgage interest and amortization leaving the lessor with an amount free of all claims." Interpretation Bulletin IT-434R, Rental of Real Property by Individual, sets out the criteria for determining whether a rental operation carried on by an individual is a source of business income or of property income. Paragraph 5 of IT-434R states:

Where a building is rented en bloc (e.g., an office building), with the landlord providing (in addition, of course, to the accommodation) only maintenance of the building as such and perhaps heat and air conditioning, the rental clearly is one of property and does not constitute the carrying on of a business. The same situation is considered to exist where a building is rented piecemeal (e.g., an apartment block) and the tenants are provided with only those basic services which, by custom, have come to be regarded as an inherent part of that kind of property rental, e.g.: heat, water, elevator service, telephone in lobby, indoor or outdoor parking spaces, laundry room with equipment for tenants, maintenance of the building itself (including janitor and window washing service, repainting of apartments), maintenance of adjacent areas (including snow and garbage removal service) and maintenance of any appliances and furnishings provided in the rented accommodation.

Essentially, the nature and extent of services provided for, or made available to, tenants must be considered in determining whether a particular operation is a leasing business. Services which would tend to indicate that the earning of rental income constitutes the carrying on of a business would include services such as cleaning of the rented premises, provision of parking attendants, security guards, the provision of meals and drinks to tenants, and a mail distribution service.

Whether or not the owner of real property which is being leased is carrying on a business or is merely earning property income from a passive investment is a question of fact to be determined based upon the terms of the particular lease. Where, under the terms of a triple net lease or management agreement, neither the owner, nor a management company acting on the owner's behalf, will provide or be required to provide services which are more than those rendered for the purpose of maintenance and structural upkeep of the property or which are beyond those basic services that would normally be included and expected for the rental of premises, it is generally our view that the owner will not be carrying on a business. However, no definitive conclusion can be made without reviewing all of the facts and documentation of the particular arrangement. As noted above, this review will only be done in the context of an advance income tax ruling.

We note that a charitable foundation, by definition, must be constituted and operated exclusively for charitable purposes. Accordingly, even if the leasing activities do not constitute the carrying on of a business, if such activities occupy a significant portion of the foundation's time and resources, it may call into question whether the foundation is operated exclusively for charitable purposes and whether such activities have become a non-charitable purpose in its own right.

We trust the above comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency in respect of any particular situation.

Yours truly,

Jenie Leigh
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch