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: How would the CRA compute the "value" of investment property where the asset is funded with non-interest bearing debt, such that both the numerator and denominator of the second quotient in the formula are zero.
Position: See response
Reasons: See response
CLHIA Conference - May 26, 2005
Question 7
Meaning of "value"
It is not clear how the definition of "value" in subsection 2400(1) of the Regulations applies where the acquisition of property is funded with non-interest-bearing debt.
The definition provides that the value of a mortgage, hypothec, an agreement of sale or an investment property that is a deposit balance is the amount by which (i) exceeds (ii). The first item is the gross investment revenue of the owner for the year from the property divided by the average annual rate of interest earned by the owner on the amortized cost of the property during the year. The second item is the interest payable by the owner, for the period in the year during which it held the property, on debt assumed or incurred by the owner in respect of the acquisition of the property (or another property for which the property is a substituted property) divided by the average annual rate of interest payable by the owner on the debt for the year.
Where the asset is funded with non-interest-bearing debt, both the numerator and the denominator of the second quotient are zero.
Question
How would the CRA compute the value of the investment property in these circumstances?
Agency's Response
Where property described in paragraph (a)(i) of the definition of "value" in subsection 2400(1) is acquired by the incurrence of debt, the value of the property is equal to the amount, if any, by which (a)(i) exceeds (a)(ii).
Where the underlying debt is not interest bearing, the CRA would not consider that the amount in subparagraph (a)(ii) is nil since zero divided by zero is an undefined amount and therefore cannot be determined. As a further consequence, the value of the property which is equal to the excess of (a)(i) over (a)(ii) cannot be determined.
As a consequence, when a property is funded with non-interest bearing debt the property will not have a value including the situation when the principal amount of the underlying debt does not fully fund the cost of the property. In the latter circumstance the CRA is prepared to consider the value of the property to be an amount equal to the excess of the amount calculated under subparagraph (a)(i) over the principal amount of the underlying debt. Such position would be consistent with the legislative intent as evidenced by the fact that if the underlying debt was interest bearing, the amount attributable to subparagraph (a)(ii) would be equal to the principal amount of the underlying debt.
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