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 equity deposit in the lease agreement should be considered an interest free loan.
Position: Question of Fact.
September 28, 2006
Re: Life lease arrangement
This is in response to your letter of May 25, 2006, inquiring about whether the terms of a life lease arrangement reflect a barter transaction.
You describe a situation of a life lease arrangement between an individual (the "Tenant") and a landlord constructing and operating a not for profit retirement housing complex (the "Housing Complex") that involves a refundable entrance fee (the "Entrance Fee") and a lease agreement (the "Agreement"). The Tenant can choose to provide between 35% and 100% of the value of his or her unit (the "Unit") as the Entrance Fee.
The Agreement pertains to the Unit in respect of which the Tenant is providing the Entrance Fee and requires that the Tenant pay the landlord rent (the "Rent") in respect of the Unit. The Rent is determined by adding the following two amounts:
- a monthly fee representing a proportionate amount of the Housing Complex's operating expenses pertaining to the Unit; and
- if, the Tenant had not provided the landlord 100% of the Unit's value as an Entrance Fee, an amount representing the interest and other charges in respect of the shortfall.
The Entrance Fee is returned to the Tenant (or the Tenant's estate) when the Tenant leaves the Housing Complex. The Tenant cannot sell the rights to occupy the Unit or sublet the Unit for a rental rate in excess of the Rent. The landlord insures the premises and is responsible for repairing and maintaining its appliances. The Tenant is responsible for repairing and maintaining any appliances not owned by the landlord as well as any alterations or improvements that the Tenant makes.
It is your view that the life estate arrangement is selling a life estate in the residential suite to the Tenant and incorporating lease provisions for the Tenant's life residency (unless the agreement is terminated earlier). You suggest that the life estate agreement is a bona fide contract of lease/life estate and any interest on the Entrance Fee is forgone in exchange for the security of tenure and for the security of the refundable Entrance Fee. It appears that your alternative argument is that the refund of the Entrance Fee represents a repurchase of the Tenant's life interest by the landlord.
The situation outlined in your letters, and additional information provided over the telephone, appears to relate to a factual situation, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca/. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
A barter transaction is effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money. A barter transaction may occur whether or not the parties are dealing at arm's length. In a barter transaction, between persons who are dealing with each other at arm's length, it is a fundamental principle that each of those persons considers that the value of whatever is received is at least equal to the value of whatever is given up in exchange therefore. Such transaction can result in income or expense as contemplated by sections 3 and 9 of the Income Tax Act. For further comments regarding barter transactions please see Interpretation Bulletin IT-490.
It is our general view that a tenant who enters into a type of lease agreement with a landlord where the fair market rent is reduced in reference to the amount of a refundable entrance fee is involved in a financing arrangement. This type of financing arrangement is generally considered a barter transaction. The tenant in this type of arrangement benefits in a similar way as in a situation where the amount loaned to a landlord is interest bearing and results in income (taxable to the tenant) that the tenant uses to pay for non-deductible personal expenses (e.g., rental costs). Therefore, consistent with our general view, the tenant in this type of arrangement would have to include the reduction of the rent granted by the landlord in exchange for the interest-free entrance fee in his/her income for tax purposes. In essence, it appears that the entrance fee is an interest-free loan and a type of investment but its return is a reduction of rental costs.
In circumstances where a tenant pays a lump sum amount that does not affect the fair market rent that the tenant pays, it is a question of fact whether the payment of the lump sum involves a bartering arrangement.
The above represents our general views on a general situation. If you have a proposed transaction, we would be prepared to review it in connection with a request for an advance income tax ruling and provide a definite opinion on the tax consequences that you wish us to confirm. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R5, Advance Income Tax Rulings, which is available on Canada Revenue Agency's web page at www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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