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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Whether the fact that the Foundation will be entering into "triple-net" leases with Company A, which is currently the tenant of the properties being transferred to the Foundation, will be regarded as consideration or benefit received by Company A, or any person not at arm's length with Company A, for the purposes of determining whether a "gift" has been made for the purpose of subsection 110.1(1).
2. Whether the taxpayer may elect for the property to be transferred at fair market value pursuant to subsection 110.1(3).
3. Whether the fact that the Foundation will be renting the properties being transferred to it will result in the Foundation being considered to be carrying on business for the purpose of paragraph 149.1(4)(a).
Position:
1. The leases would not be considered to be consideration or benefit received by the donor or a person not at arm's length with the donor for the purposes of determining whether a gift has been made pursuant to subsection 110.1(1).
2. Provided the FMV of each property being transferred is greater than the acb of the property, and provided the property is capital property, the taxpayer may elect under subsection 110.1(3) for the property to be transferred at fair market value.
3. Question of fact. In this case, based on the terms of the "triple-net" leases, the Foundation will not be carrying on business for the purposes of paragraph 149.1(4)(a).
Reasons:
1. The Foundation is to be paid fair market value rent by Company A in exchange for the right to use the property under the terms of the "triple-net" leases and the Foundation acquired the property for the purpose of leasing it to earn income. The fact that a foundation enters into a fair market lease with a donor, in respect of property donated, will not in and of itself, cause the donation not to be a gift for income tax purposes.
2. Straight-forward but concern raised because the use of the provision was challenged in the Jabs Construction Company Ltd. case.
3. Based upon the specific terms under the lease and the proposed management agreement, the Foundation is not providing any services to the tenants which would indicate that it was earning income from other than a passive investment.
XXXXXXXXXX
XXXXXXXXXX 2000-000254
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: Advance Income Tax Ruling Request for XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, which replaced the advance income tax ruling on behalf of the above named taxpayer, originally received on XXXXXXXXXX. We also acknowledge the information provided in your correspondence of XXXXXXXXXX and during our various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayers involved: none of the issues involved in the ruling request
(i) is in an earlier return of the taxpayer or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) is under objection by the taxpayer or a related person,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
(v) is the subject of a ruling previously issued by the Directorate;
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Facts
1. The taxpayers subject to the advance income tax ruling request are XXXXXXXXXX ("Foundation") and XXXXXXXXXX ("Company A").
2. XXXXXXXXXX ("Mr. X") (XXXXXXXXXX)is a resident and citizen of Canada. Mr. X is not a resident or citizen of any other country. Mr. X has devoted substantial amounts of time and wealth to charitable causes and has made substantial contributions to charities.
3. XXXXXXXXXX ("Company X") is a Canadian controlled private corporation ("CCPC"), as defined in subsection 248(1), for purposes of the Act, and is wholly owned by Mr. X. The company is a holding company. The company's taxation year end is XXXXXXXXXX. The company's XXXXXXXXXX, and reports to the XXXXXXXXXX TSO and the XXXXXXXXXX Tax Centre.
4. Company A is a CCPC, as defined in subsection 248(1) for purposes of the Act, and is a wholly owned subsidiary of Company X. Company A is a XXXXXXXXXX. The company's taxation year end is XXXXXXXXXX. The company's XXXXXXXXXX, and reports to the XXXXXXXXXX TSO and the XXXXXXXXXX Tax Centre.
5. XXXXXXXXXX ("Company B") is a CCPC, as defined in subsection 248(1) for purposes of the Act, and is wholly owned by XXXXXXXXXX. The company is a XXXXXXXXXX company with a taxation year end of XXXXXXXXXX. The company's revenue is primarily from rental properties leased to Company A. The rental properties are secured by existing mortgages with various commercial lenders. The company's XXXXXXXXXX, and reports to the XXXXXXXXXX TSO and the XXXXXXXXXX Tax Centre.
6. The leases between Company B and Company A are "triple net leases" having arm's length terms. Consequently, as lessee, Company A is responsible for all costs in relation to the buildings. Further, Company B does not, and is not required at any time to, provide any additional services of any kind to Company A in relation to the land and building.
7. The real properties owned by Company B and leased to Company A are all commercial, as opposed to residential properties.
8. XXXXXXXXXX ("Company C"), a CCPC as defined in subsection 248(1) for purposes of the Act, is wholly owned by Mr. X. Company C is a real estate investment company. The company's taxation year end is XXXXXXXXXX. The company's income is derived primarily from rental properties leased to Company A. The rental properties are secured by existing mortgages. The company's XXXXXXXXXX, and reports to the XXXXXXXXXX TSO and the XXXXXXXXXX Tax Centre.
9. The leases between Company C and Company A are "triple net leases" having arm's length terms. Consequently, as lessee, Company A is responsible for all costs in relation to the buildings. Further, Company C does not, and is not required at any time to, provide any additional services of any kind to Company A in relation to the land and building.
10. The real properties owned by Company C and leased to Company A are XXXXXXXXXX.
11. The Foundation was incorporated under the XXXXXXXXXX. According to a letter received XXXXXXXXXX from the Charities Division, the Foundation was registered as a charity effective XXXXXXXXXX and is a private foundation as defined in subsection 149.1(1). The Foundation has a fiscal year end of XXXXXXXXXX. The Foundation's XXXXXXXXXX and reports to the Charities Division.
12.
XXXXXXXXXX
At this time, the Foundation has only XXXXXXXXXX members, and therefore the Foundation is controlled by any combination of XXXXXXXXXX existing members. These XXXXXXXXXX members are the directors of the Foundation and are not related persons as defined in subsection 251(2) of the Act.
Since it is not controlled by a "related group" as defined in subsection 251(4), for the purposes of the Act, the Foundation is not deemed to be related to Company A, Company B, or Company C. That is, paragraph 251(2)(c) does not apply and the Foundation and the companies are not deemed by paragraph 251(1)(a) not to deal at arm's length. Since they are not subject to the deeming provision, it is a question of fact whether the Foundation and the companies deal at arm's length.
13. The purpose of the Foundation is to XXXXXXXXXX.
Purpose of Proposed Transactions
The purpose of the proposed plan is to "capitalize" the Foundation with rental properties that will yield favourable returns in the form of rental income and capital appreciation that can, in turn, be used to fund the Foundation's charitable activities.
Proposed Transactions
14. Company B is to transfer the following properties to Company A on a tax deferred basis pursuant to subsection 85(1) of the Act.
Estimated Adjusted Undepreciated Estimated
Location Fair Market Value Cost Base Capital Cost Mortgage Balance
("FMV") ("ACB") ("UCC")
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
As consideration for the properties, Company A will assume the existing mortgage and issue Company B promissory notes and preferred shares. To the extent the amount the ACB of the land exceeds the mortgage assumed in as consideration for the land a promissory note will be issued for the difference. To the extent the amount elected at in respect of the building exceeds the mortgage assumed as consideration for the building a promissory note will be issued for the difference. The balance of the consideration for the transfers will be in the form of preferred shares of Company A to be issued to Company B. Consequently, the non-share consideration received in respect of the land will not exceed the tax cost of the land and the non-share consideration received in respect of the building will not exceed the tax cost of the building. The parties will elect to transfer the properties at their respective UCC or ACB. The companies will file the appropriate form T2057 within the time prescribed by the Act. The necessary sale/purchase agreements will be prepared to legally effect the transfer of properties.
15. Company C is to transfer the following properties to Company A on a tax deferred basis pursuant to subsection 85(1) of the Act.
Estimated Adjusted Undepreciated Estimated
Location Fair Market Value Cost Base Capital Cost Mortgage Balance
("FMV") ("ACB") ("UCC")
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX XXXXXXXXXX
As consideration for the XXXXXXXXXX properties, Company A will assume the existing mortgage and issue Company C promissory notes and preferred shares. To the extent the ACB of the land exceeds the mortgage assumed as consideration for the land, a promissory note will be issued for the difference. To the extent the UCC of the building exceeds the mortgage assumed as consideration for the building a promissory note will be issued for the difference. The balance of the consideration for the transfers will be in the form of preferred shares of Company A to be issued to Company C. Consequently, the non-share consideration received in respect of the XXXXXXXXXX land will not exceed the tax cost of the XXXXXXXXXX land and the non-share consideration received in respect of the XXXXXXXXXX Building will not exceed the tax cost of the XXXXXXXXXX building. The parties will elect to transfer the XXXXXXXXXX properties at their respective UCC or ACB. The companies will file the appropriate form T2057 within the time prescribed by the Act. The necessary sale/purchase agreements will be prepared to legally effect the transfer of properties.
As consideration for the XXXXXXXXXX properties, Company A will issue Company C promissory notes and preferred shares. The promissory note issued as consideration for the land will not exceed the ACB of the land and the promissory note issued as consideration for the building will not exceed the UCC of the building. Preferred shares of Company A will be issued to Company C for the balance of the consideration in respect of the transferred properties. Consequently, the non-share consideration in respect of the XXXXXXXXXX land will not exceed the tax cost of the land and the non-share consideration in respect of the XXXXXXXXXX building will not exceed the tax cost of the building. The parties will elect to transfer the XXXXXXXXXX properties at their respective UCC or ACB. The companies will file the appropriate form T2057 within the time prescribed by the Act. The necessary sale/purchase agreements will be prepared to legally effect the transfer of properties.
16. Upon acquiring the properties, Company A will pay off the balance of the mortgages.
17. Company A will donate the unencumbered properties to the Foundation. The donation will stipulate that the Foundation is to retain the properties, or properties substituted therefore, for a period of not less than XXXXXXXXXX years. Pursuant to subsection 110.1(3), Company A will designate the transfer amount to be the FMV of the property.
18. The Foundation will acquire an independent appraisal of the properties, and issue a donation receipt to Company A equal to the FMV of the properties received.
19. The Foundation will negotiate new agreements to lease the properties to Company A. The lease agreements will be "triple-net" leases having arm's length terms, and will be the same as the lease agreements currently existing between Company B and Company A, and Company C and Company A, except that the length of the leases may be extended beyond the periods covered under the existing leases on the properties. The Foundation is to engage an arm's length property manager to ensure the terms of the lease are being honoured, to collect the rents and to negotiate leases as they come due.
20. Neither the Foundation, nor the management company acting on its behalf, will be required to provide under the terms of the "triple-net" leases or management agreement, nor will they in fact 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 in the rental of premises.
21. The Foundation will use the rental proceeds to fund its ongoing charitable activities.
Other
You have also indicated to us that rental properties owned by other corporations controlled by Mr. X may be transferred to the Foundation at a future time, in order to further capitalize the Foundation. None of the rulings provided in this letter, should be construed to apply to these future contemplated transactions.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
A. Provided that the rents being charged under the "triple-net" leases are fair market value rents, the fact that the Foundation will be entering into the "triple-net" leases with Company A, which is currently the tenant of the properties being transferred to the Foundation, will not be regarded as consideration or benefit received by Company A, or any person not at arm's length with Company A, for the purposes of determining whether a "gift" has been made for the purpose of subsection 110.1(1).
B. Provided the properties being transferred to the Foundation by Company A, are capital property to Company A, and provided the fair market value of each property exceeds the adjusted cost base of the property as is indicated by paragraphs 14 and 15 above, the taxpayer may elect to transfer the property at fair market value pursuant to subsection 110.1(3).
C. Provided the leases between the Foundation and Company A are, and continue to be, as described in paragraphs 19 and 20 above, the Foundation will not be considered to be carrying on business for the purposes of paragraph 149.1(4)(a).
The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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