2004 Ruling 2003-0036291R3 - Gift and Leaseback

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:

Whether the proposed donation of commercial property to a Charity will result in a gift for income tax purposes when space is leased back to the donor.

Whether the fact that the Charity will be leasing space in the transferred property to the donor and XXXXXXXXXX other tenants will result in the Charity being considered to be carrying on a business for the purpose of paragraph 149.1(2)(a).

Position:

Question of fact. In this case, provided that the rent to the Charity represents fair market value, the lease with the donor would not be regarded as consideration or benefit received by the donor with the result that the proposed transfer would constitute a gift.

Question of fact. In this case, based on the facts as described and the terms of the draft lease with the donor and the existing leases that will be assigned to the Charity on the completion of the gift, it is our view that the Charity will not be carrying on a business for the purposes of paragraph 149.1(2)(a).

Reasons:

Meets the definition of a gift.

Based on the terms of the leases, the Charity is not providing any services to the tenants that would indicate that it is earning income from a business.

XXXXXXXXXX 						2003-003629

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and subsequent correspondence up to and including XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayers. We also acknowledge the information provided during our various telephone conversations in connection with your request (XXXXXXXXXX).

You advise that to the best of your knowledge and that of the taxpayers referred to above, none of the issues involved in the ruling request:

i. is in an earlier return of the taxpayers or related persons;

ii. is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;

iii. is under objection by the taxpayers or related persons;

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 considered by the Directorate.

Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, 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.

DEFINITIONS

a) "ACO" means XXXXXXXXXX,

b) "BCO" means XXXXXXXXXX,

c) "CCO" means XXXXXXXXXX,

d) "Charity" means XXXXXXXXXX,

e) "CCRA" means the Canada Customs and Revenue Agency,

f) "Current Premises" means the land and building located at XXXXXXXXXX;

g) "DCO" means XXXXXXXXXX,

h) "ECO" means the XXXXXXXXXX,

i) "FCO" means XXXXXXXXXX, and

j) "Property" means the commercial lands and premises located in XXXXXXXXXX.

FACTS

1) The Charity was incorporated as a charitable corporation under The Non-profit Corporations Act (XXXXXXXXXX) on XXXXXXXXXX. Pursuant to its Articles of Incorporation, XXXXXXXXXX. It is a "charitable organization" within the meaning of subsection 149.1(1). Its office is in XXXXXXXXXX.

2) The objects of the Charity are:

XXXXXXXXXX.

3) ACO is a taxable Canadian corporation incorporated pursuant to the laws of the Province of XXXXXXXXXX. Its office is located in XXXXXXXXXX. Its tax services office is the XXXXXXXXXX TSO and its tax centre is the XXXXXXXXXX Tax Centre.

4) ACO is engaged in the business of XXXXXXXXXX.

The Property

5) On XXXXXXXXXX, ACO purchased the Property from BCO for $XXXXXXXXXX. The Property was paid for by ACO without mortgage or other debt financing. Existing leases BCO had with tenants located on the Property were assigned to ACO at that time.

6) The Property is located in XXXXXXXXXX. There are XXXXXXXXXX buildings and a XXXXXXXXXX located on the Property. The buildings consist of a XXXXXXXXXX.

7) The total square footage of the main plant is XXXXXXXXXX square feet. ACO currently occupies XXXXXXXXXX square feet of the main plant. CCO and XXXXXXXXXX other tenants occupy part of the remaining space in the main plant. ACO has given notice to the XXXXXXXXXX other tenants to vacate the premises at the end of XXXXXXXXXX. ACO's lease with CCO expires on XXXXXXXXXX.

8) The total square footage of the industrial office is approximately XXXXXXXXXX square feet. Currently, DCO, ECO and XXXXXXXXXX other tenants occupy the industrial office. The lease with ECO expires on XXXXXXXXXX. The leases with DCO and the XXXXXXXXXX other tenants are month to month leases.

9) Currently, XXXXXXXXXX square feet of the XXXXXXXXXX is being leased to FCO, which operates as an XXXXXXXXXX. FCO also currently leases XXXXXXXXXX square feet of the southwest corner of the Property for XXXXXXXXXX. FCO is a month to month tenant.

10) The XXXXXXXXXX are currently vacant and are not being used for any purpose at this time. These buildings are not heated and currently have no utilities or other services.

11) The leases that ACO currently have with CCO, DCO, and ECO are "gross" leases having arm's length terms. The terms of the three leases are similar. As landlord, ACO is responsible for paying the operating costs, including:

a) repairs and maintenance to the buildings;

b) repairs, maintenance and cleaning of common areas, including main entrances and male and female washrooms;

c) snow removal in yard and parking lot;

d) real property taxes;

e) garbage removal;

f) utilities, and

g) the cost of fire and extended coverage insurance.

The tenants are responsible for paying the cost of leasehold improvements and the cost of all risk property insurance and third party liability insurance. Leasehold improvements become the landlord's property on termination or expiry of the leases. There are no security or protective services provided to any of the tenants located on the Property.

12) There are XXXXXXXXXX encumbrances currently registered against the Property:

a) XXXXXXXXXX,

b) XXXXXXXXXX, and

c) XXXXXXXXXX.

The Charity's Current Premises

13) The Charity owns its Current Premises. The Current Premises are approximately XXXXXXXXXX square feet and are located on approximately XXXXXXXXXX of land.

14) The Charity requires XXXXXXXXXX.

15) The Charity currently rents space to XXXXXXXXXX organizations in its Current Premises. You advise that the rent to the Charity represents fair market value. Further, the Charity does not currently provide any services to the tenants located on the Current Premises.

PROPOSED TRANSACTIONS

16) Pending the receipt of a favourable ruling, ACO will give notice to all month to month tenants on the Property (except DCO) to terminate their leases within XXXXXXXXXX days.

17) Immediately following the effective date of termination of all leases to be terminated, ACO and the Charity will enter into a deed of gift (the "Deed") pursuant to which ACO will irrevocably donate the Property to the Charity. ACO will assign the current leases with CCO, DCO and ECO to the Charity and the Deed will provide that the Charity, as owner, will be entitled to all monies in respect of any rents due and payable in connection with the Property. The encumbrances currently registered against the Property will continue following the transfer of the Property to the Charity. You advise that ACO will not receive any benefit or advantage in respect of the donation of the Property to the Charity.

18) The Charity intends to engage an independent real estate appraiser to determine the fair market value of the Property prior to issuing a charitable receipt. It has not yet been decided whether an official donation receipt will be issued to ACO in respect of the donated Property. If the Charity issues a donation receipt to ACO, it will be in an amount equal to the fair market value of the Property on the date of donation as determined by the independent real estate appraiser.

19) Immediately following the transfer of the Property to the Charity, the Charity will lease back XXXXXXXXXX square feet of the main plant located on the Property to ACO (the "Lease") as well as XXXXXXXXXX square feet of the land to be used for a parking lot. The Lease will be a "triple net" lease and will include the following terms and conditions:

a) The term of the Lease will be XXXXXXXXXX years with XXXXXXXXXX options to renew of XXXXXXXXXX years each on the same terms and conditions as the initial term;

b) ACO will pay a basic rent of $XXXXXXXXXX per annum (which equates to approximately $XXXXXXXXXX per square foot) payable in instalments on a monthly basis;

c) ACO will also pay monthly as additional rent that portion of the total operating costs of the main building and land that equals to the portion that the leased premises constitutes of the main building and land. Such operating costs include:

i) the cost of heating, ventilating and air-conditioning systems;

ii) real property taxes;

iii) the cost of water and sewer charges;

iv) the cost of electricity or natural gas;

v) the cost of insurance that the Charity as landlord is obliged to carry; and

vi) the cost of maintaining the main building (including the grounds, parking lot and snow removal).

d) ACO will be responsible for all costs and expenses attributable to the repair, maintenance, and replacement of the XXXXXXXXXX equipment connected to the space to be occupied by ACO;

e) The Charity will be responsible for the repair and maintenance of the exterior and common interior of the main building;

f) ACO will be responsible for repairing and maintaining at its own cost, the leased premises, including leasehold improvements. The leasehold improvements will become the property of the Charity on the expiry of the Lease;

g) The Charity will keep in force fire and extended coverage insurance; and

h) ACO will provide and keep in force for the benefit of the Charity and ACO general liability insurance, insurance upon leasehold improvements owned by the tenant and glass insurance on glass on the leased premises.

20) You advise that the terms of the Lease including the basic rent of $XXXXXXXXXX are representative of current commercial arm's length lease arrangements.

21) The Charity will engage an arm's length property manager to ensure that the terms of the leases are being honoured, to collect the rents, to negotiate leases with respect to the Property as they become due and to provide the basic services.

22) The Charity will use all rental proceeds received from the Property to further its charitable objects and to fund its ongoing charitable activities.

OTHER INFORMATION

23) You advise that the Charity and ACO deal at arm's length.

24) You advise that the Charity intends to occupy XXXXXXXXXX square feet of the main plant as well as additional space in the XXXXXXXXXX. After the transfer of the Property, the Charity will begin moving and undertaking basic renovations. The Charity will raise additional funds to carry out the necessary renovations to the Property. The Charity will undertake to sell the Current Premises and use the proceeds to fund the cost of the renovations and relocation to the Property. The Charity intends to move a portion of its operations into the main plant immediately upon the transfer of the Property and expects to have all of its operations moved over to the main plant by XXXXXXXXXX.

25) It is the intention of the Charity to have non-profit, charitable and government organizations that work/co-operate with the Charity on an ongoing basis for the purpose of providing services relating to the welfare of the Charity's clientele occupying space in the industrial office. All entities that are qualified donees will be provided office space in the industrial office on a cost-recovery basis. All other entities will be charged rent that represents fair market value. The Charity will not provide any services with respect to the leasing of space on the Property, except for basic services relating to maintenance and structural upkeep.

PURPOSE OF PROPOSED TRANSACTIONS

26) The purposes of the proposed transactions are:

a) to accommodate the Charity's growing demands for space and XXXXXXXXXX requirements in carrying out its charitable activities; and

b) to provide the Charity with a rental property that will yield favourable returns in the form of investment income and capital appreciation that can, in turn, be used to fund the Charity's charitable activities.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all the proposed transactions, and purposes 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 rent being charged to ACO under the Lease represents fair market value, an amount equal to the fair market value on the date of the donation of the Property donated by ACO to the Charity will qualify as a gift as described in paragraph 110.1(1)(a), provided an official receipt containing prescribed information is issued and is filed as required by subsection 110.1(2).

B. Provided that the terms of the Lease between the Charity and ACO and the terms of the leases with CCO, DCO and ECO assigned to the Charity are and continue to be as described in 11 and 19 above, the Charity will not be considered to be carrying on a business for the purposes of paragraph 149.1(2)(a).

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CCRA provided that the proposed transactions are completed before XXXXXXXXXX.

In addition, nothing in this letter should be construed as implying that the CCRA has confirmed, reviewed or has made any determination in respect of:

(a) the fair market value of any property referred to herein; or

(b) the tax consequences related to future transactions described in 25 above as the specific details of these transactions are not yet known.

COMMENTS

Draft amendments originally released by the Department of Finance on December 20, 2002 and included in the revised package of draft amendments released on February 27, 2004 propose to recognize a gift, for tax purposes, in certain circumstances where a donor has received consideration or other benefit for property transferred to a registered charity or qualified donee after December 20, 2002. Pursuant to the draft amendments, the amount deductible by a corporation will generally be the "eligible amount" of a gift as defined in draft subsection 248(30) provided that an official receipt containing prescribed information is issued and filed. The explanatory notes in the February 27, 2004 package indicate a proposal to amend subsections 3501(1), (1.1) and (6) of the Income Tax Regulations to provide that official receipts issued by a registered organization in respect of a gift made after December 20 2002 contain, in addition to the information already prescribed, the "eligible amount" of the gift.

Yours truly,

XXXXXXXXXX
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch