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: Is the prepaid rent received by the taxpayer in respect of leased vehicles included in income pursuant to section 9 of the Income Tax Act (the Act) or does subparagraph 12(1)(a)(i) of the Act apply to include the prepaid rent in income? The latter would entitle the taxpayer to deduct a reasonable amount as a reserve under paragraph 20(1)(m) of the Act.
Position: The prepaid rent is included in subparagraph 12(1)(a)(i) of the Act.
Reasons: Prepaid rent received by a taxpayer falls within subparagraph 12(1)(a)(i) of the Act if the amount received "may be regarded as not having been earned in the year or a previous year". This seems to be the basis for the statements made in paragraph 8 of IT-154R and paragraph 9 of IT-261. The latter states, in part, "where a landlord receives a payment of rent which represents income from a business, he must include the full amount of prepayment in computing his income for the year of receipt by virtue of paragraph 12(1)(a)".
September 12, 2001
Toronto Centre Tax Services Office HEADQUARTERS
Murray Davie Jacques E. Grisé
Verification and Enforcement Division 957-2059
2001-008997
XXXXXXXXXX
This is in reply to your memorandum of June 20, 2001, expressing concern with the conclusion in our memorandum of May 30, 2001 on the application of paragraph 20(1)(m) of the Income Tax Act (the Act) in respect of prepaid rent received by XXXXXXXXXX (the company).
Your first concern is that you "do not think that the balance in the General account is guaranteed as belonging to the Trust." The term "General Account" is defined as follows in the Purchase Agreement (the purchase agreement) of XXXXXXXXXX between the company and XXXXXXXXXX (the Trust):
"General Account" means XXXXXXXXXX.
In the purchase agreement, the Trust is referred to as the Purchaser. In view of the above, we have no difficulty in concluding that the funds in the General Account belong to the Trust.
Your second concern is that clause XXXXXXXXXX of the purchase agreement does not appear to require the company to provide any refund relating to the amount being claimed as a reserve pursuant to paragraph 20(1)(m) of the Act (the 20(1)(m) reserve). The amount being claimed as the 20(1)(m) reserve by the company is in respect of the portion of the rent received in advance from the trust for the use of vehicles owned by the company. Such vehicles are leased to third parties who provide the Trust with compensation for the use of the vehicles. As explained in our memorandum of May 30, 2001, it becomes relevant to determine if the Trust is entitled to recover an appropriate portion of the prepaid rent if for some reason a vehicle leased by the Trust were to be unavailable for use for a part of the lease term.
If any of the vehicles in question are sold, destroyed or stolen, the company, as owner of the vehicles, would be entitled to the proceeds of disposition or any resulting insurance payments. Pursuant to clause XXXXXXXXXX of the purchase agreement, the net proceeds from such a sale or insurance claim are to be deposited to the General Account (i.e., to the Trust's account). In this manner, the Trust recovers prepaid rent from the company when a vehicle becomes unavailable for use for a part of the lease term.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. A copy will be sent to you for delivery to the client.
We hope our comments are helpful.
John Oulton, CA
Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
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