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:
A tenant who has rented a unit in an apartment building makes an interest-free loan to the landlord in exchange for a reduction of his rent. The issue is whether the amount of the reduction is investment income derived from the loan which is taxable under the Act.
Position TAKEN:
The reduction of rental costs in exchange of an interest-free loan is considered to be bartering and therefore the amount of the forgone rent is taxable.
REASONS FOR POSITION TAKEN:
Bartering rent for interest.
XXXXXXXXXX 2001-006651
Yves Leclerc
March 2, 2001
Dear Sir:
Re: Interest free loan to a non-profit organization
This is in reply to your letter dated November 1, 2000 in which you requested our opinion on the tax consequences to individuals who made an interest-free loan to a charitable organization in exchange for a reduction of rent on a housing unit that they are residing in.
In summary, the situation under consideration, as we understand it, is as follows:
- XXXXXXXXXX is a registered charitable organization that is set up to provide low cost housing for senior citizens.
- The senior residence building was developed partly through funds which were borrowed from financial institutions, and partly through interest-free loans from tenants. Any money that is loaned by a financial institution will be secured by a mortgage over the lands and the retirement facility.
- The financial institution required that the tenants would agree in writing that the financial institution will have priority over the right of any tenant to repayment of its mortgage.
- Any tenant who has loaned money interest-free will enjoy a reduction of the rent that would otherwise be payable. The reduction is equal to the proportion of the rent otherwise payable that the amount of interest-free loan is of the fair market value of the housing unit. All tenants will be required to pay operating and maintenance costs separately.
- The XXXXXXXXXX owns the units and the ownership does not pass to the tenant. When a tenant leaves the unit that he/she occupied, voluntarily or upon death, the interest-free loan will be repaid to the tenant or his/her estate.
- The interest-free loan made out to the XXXXXXXXXX cannot be converted into equity.
- A small percentage of tenants did not enter into the said loan agreement. These tenants have to pay full rent for occupying their units.
The situation outlined in your letter, and the additional information provided over the telephone, involves an actual fact situation that is already in place. As indicated in paragraph 7 of Information Circular IC 70-6R4 dated January 29, 2001, issued by the Canada Customs and Revenue Agency ("CCRA"), advance income tax rulings are not issued on transactions that are already completed. However, we can offer the following general comments.
The arrangement herein described, is much like the arrangement described in our document # 9833425 dated June 7, 1999 to which you refer. The receipt of free rental accommodation in exchange for an interest-free loan is a barter transaction. As described in paragraph 4 of Interpretation Bulletin IT-490, the CCRA considers that barter transactions can result in income, contemplated under sections 3 and 9 of the Act.
In our opinion, this type of arrangement gives an advantage to the tenant in comparison with a situation where the amount loaned to the organization would otherwise be interest bearing and resulting in taxable income in the hands of the tenant who uses the income to pay for his/her non-deductible personal expenses (e.g. the cost of occupying the rental unit). In the latter situation, the person who generated the interest income on the invested funds would be taxable on that income. Therefore, it is our view, that a tenant who enters into this type of agreement with the landlord, would have to include the reduction of the rent granted by the landlord in exchange for the interest-free loan in his/her income for tax purposes. In essence, the interest-free loan is a type of investment but its return is a reduction of rental costs, in lieu of interest. Such investment return is nevertheless taxable.
You also refer to another fact situation which is described in our technical interpretation # 9529455. That interpretation refers to a case where an individual acquires a leasehold interest in a building in exchange for a lump sum payment. The payment is not a loan. Accordingly, the views expressed in that opinion letter are not applicable to the facts of your case.
In our opinion, the income derived by a particular tenant from his/her interest-free loan would be equal to the amount by which his rent otherwise payable has been reduced in the particular taxation year.
We hope that the above comments are of assistance to you.
Olli Laurikainen
Corporate Financing Section
Financial Industries Division
Income Tax Rulings Directorate
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