Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
A taxpayer received a cash rebate from a financial institution as compensation for a higher interest rate required to be paid on a loan to finance a rental property.
1) What tax treatment should be accorded to the cash rebate?
2) Can the taxpayer elect to apply the amount of the cash rebate to the adjusted cost base of the land pursuant to subsection 53(2.1) of the Act or to reduce the capital cost of the building pursuant to subsection 13(7.4)?
3) Is there a difference in tax treatment depending on whether the taxpayer uses the cash method of accounting instead of the accrual method?
Position:
1) Application of paragraph 12(1)(x) of the Act and, depending on the circumstances, possible election under subsection 12(2.2) of the Act.
2) No.
3) No.
Reasons:
1 and 2) The elections under subsections 13(7.4) and 53(2.1) of the Act, respectively, do not appear to be available since the cash rebate made by the financial institution does not appear to be received by the taxpayer in respect of depreciable property as required by subsection 13(7.4) or received as part of the cost of a property as referred to in subsection 53(2.1). Rather, the cash rebate appears to be received because the taxpayer agreed to take out a 5-year mortgage with the financial institution at a less competitive interest rate and not because the taxpayer acquired the rental property.
3) If the taxpayer uses the cash method of accounting for rental income, we are of the view that, to the extent that the taxpayer has not already taken the amount of the rebate into account in computing income under section 9, the provisions of paragraph 12(1)(x) apply to the cash rebate and the cash rebate must be added back to the taxpayer's income in the year received.
XXXXXXXXXX Danielle Bouffard
2004-009160
January 19, 2005
Dear Sir,
Subject: Request for technical interpretation:
Tax consequences of an incentive payment in the form of cash back
This is further to your fax of August 18, 2004, in which you requested our opinion regarding the tax treatment of a cash rebate provided by a financial institution in connection with the financing of the acquisition of a rental property. We apologize for the delay in responding to this request.
The facts are as follows:
A taxpayer wishes to purchase a rental property with a value of $500,000.
His financial institution offers him a 5-year mortgage, providing financing of $400,000.
The financial institution also gives the taxpayer with 5% cash back, or $20,000, which the taxpayer uses for, inter alia, the down payment. This cashback is granted to the taxpayer in exchange for a 5-year mortgage loan at the interest rate "posted" by the financial institution and not at a rate negotiated "on the best possible market terms" for such a term.
Questions
What is the tax treatment to the taxpayer of the $20,000 cashback?
Can the taxpayer elect to apply the amount of the rebate to the adjusted cost base (ACB) of the land pursuant to subsection 53(2.1) of the Income Tax Act (the "Act") or to reduce the capital cost of the building pursuant to subsection 13(7.4) if the financing is obtained as part of the acquisition of the rental property?
Is there a difference in the tax treatment depending on whether the taxpayer uses the cash method of accounting instead of the accrual method?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
Paragraph 12(1)(x) of the Act provides that certain amounts received as inducement payments must be included in computing a taxpayer's income from a business or property unless one of the exceptions in subparagraphs 12(1)(x)(v) to (viii) applies. Among others, the following amounts are not included in computing income pursuant to paragraph 12(1)(x): amounts that have already been included in computing the taxpayer's income or deducted in computing any balance of expenses; amounts that have reduced the capital cost of depreciable property under subsection 13(7.4), the cost of a property under paragraph 53(2)(s) pursuant to subsection 53(2.1) or the amount of an expense under subsection 12(2.2).
Generally, whether one of the exceptions in paragraph 12(1)(x) applies in a particular situation is a question of fact that can only be resolved after a review of all the facts relating to a particular situation. In our view, to make such a determination, it is relevant to examine all the documents, including the loan agreement, describing the terms and conditions of the cashback granted by the financial institution. In particular, it should be determined whether the cashback was in fact granted because of the non-negotiated interest rate or whether it was granted because of the loan.
In the present situation, based solely on the facts you presented, the elections under subsections 13(7.4) and 53(2.1) do not appear to be available since the cash rebate made by the financial institution does not appear to have been received by the taxpayer in respect of depreciable property as required by subsection 13(7.4) nor received on account of the cost of a property as referred to in subsection 53(2.1). Rather, the cash rebate appears to have been received because the taxpayer agreed to take out a 5-year mortgage with the financial institution at a less competitive interest rate and not because the taxpayer acquired the rental property.
In such a situation, if the cash rebate does in fact offset the higher loan interest rate that the taxpayer will have to pay, this amount could be related to the additional expense that the taxpayer will have to incur, i.e., the difference between the amount of interest calculated at the non-negotiated rate and the amount of interest that the taxpayer would have paid had the taxpayer not accepted the cash rebate. Provided the taxpayer has not already taken the amount of the rebate into account in computing income under section 9, subsection 12(2.2) may apply in respect of this additional interest amount if an election is made to that effect. This election will result in the additional interest expense incurred or made in the year of receipt of the cashback or the following year being reduced. The cashback received from the financial institution that does not reduce the amount of interest expense pursuant to subsection 12(2.2) will therefore be required to be included in the taxpayer's income in the year it is received pursuant to paragraph 12(1)(x).
In most cases, the accrual method is used to compute rental income. However, as stated in the 2004 T4036 Guide Rental Income, if the taxpayer has virtually no receivables or expenses incurred and unpaid at the end of the year, the cash method may be used. In this context, if the taxpayer uses the cash method to account for rental income, we are of the view that, provided the taxpayer has not already taken the amount of the rebate into account in computing income under section 9, the provisions of paragraph 12(1)(x) apply to the cash rebate. The cash rebate must be included in the taxpayer's income in the year in which it is received unless the taxpayer elects under subsection 12(2.2) of the Act to have the rules described in the preceding paragraph apply.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Ghislaine Landry, CGA
for the Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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