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: 1) (a)Whether the income earned by a trust could qualify as "rent from real or immovable properties" as defined under paragraph 122.1(1) of the Act if the trust enters into a "master lease" on a net-net-net basis pursuant to which it would lease the entire premises (which would qualify as "real or immovable property" as defined under paragraph 122.1(1)) to a third party who would operate the property as a hotel or a residential care facility?
b) Whether rent based on the percentage of the gross rents received, as opposed to rent based on profits, would qualify as "rent from real or immovable properties" pursuant to subsection 122.1(1)?
c) Whether the reference to "revenu" of the French version of the Act in paragraphs (b) and (c) of the definition "real estate investment trust' in subsection 122.1(1) refers to gross sales or rentals, as opposed to the notion of "profit" described in subsection 9(1) of the Act?
2) Whether the portion of the income of a limited partnership (of which a trust is one of the limited partners) which would constitute "rent from real or immovable properties" pursuant to subsection 122.1(1) would retain its character as "rent from real or immovable properties" when allocated to the trust assuming the said limited partnership would satisfy the conditions set out as defined in subparagraph 122.1(1)(a)(i) of the definition of "real or immovable property"?
3) Whether a trust that invests solely in mortgages relating to immovable properties situated in Canada would qualify as a REIT pursuant to subsection 122.1(1)?
4) Whether that as of October 31, 2006 a trust-on-trust structure would qualify as a REIT pursuant to subsection 122.1(1) in circumstances where the investments of the subsidiary trust would satisfy the conditions of the definition of REIT?
Position: 1 a) General comments b) generally, yes, if the gross amount would also be rent from real or immovable property to the lessee c) revenue 2) We are inclined to consider that the trust derives its revenues from the same eligible sources as the limited partnership (such as rent from real or immovable properties).3) Question of fact-general comments 4) As a result of a modification to the definition of "rent from real or immovable properties" in subsection 122.1(1), where a trust that is a beneficiary of another trust, receives a payment from the other trust's income which is derived from rent from real or immovable properties, that payment could qualify for the purposes of the REIT revenue tests in subparagraph (b) and (c) of that definition.
Reasons: 1) and 2) Interpretation of the Act. 3) Very unlikely that the requirements of paragraphs (a) and (d) of the REIT definition be met 4) Change to the definition of "rent from real or immovable properties" (2009, c. 2, s. 50(1); royal assent of Bill C-10 received on March 12, 2009).
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2007-024417
Danielle Bouffard
October 29, 2010
Dear Sir:
Re: Specified Investment Flow-Through Trust ("SIFT trust")
This is in reply to your letter of July 6, 2007 in which you requested our opinion regarding the application of section 122.1 of the Income Tax Act (the "Act").
We will respond to your questions in the order they were presented in your letter.
Question 1- Master Lease
(a) Whether the income earned by a trust could qualify as "rent from real or immovable properties" as defined under subsection 122.1(1) of the Act if the trust enters into a "master lease" on a net-net-net basis pursuant to which it would lease the entire premises (which would qualify as "real or immovable property" as defined under subsection 122.1(1)) to a third party with whom it deals at arm's length, who would operate the property as a hotel or a residential care facility?
(b) Whether rent based on a percentage of the gross rents received, as opposed to rent based on profits, would qualify as "rent from real or immovable properties" pursuant to subsection 122.1(1)?
(c) Whether the reference to "revenu" of the French version of the Act in paragraphs (b) and (c) of the definition of "real estate investment trust' in subsection 122.1(1) refers to gross sales or rentals, as opposed to the notion of "profit" described in subsection 9(1) of the Act?
Our comments
(a) The terms "rent", "lease", "master lease" and "net-net-net lease" are not defined in the Act. In Black's Law Dictionary (6th Edition), they are defined as follows:
"rent": consideration paid for use or occupation of property; (in a broader sense) compensation or fee paid, usually periodically, for the use of any rental property, land, buildings, equipment, etc.
"lease": when used with reference to tangible personal property, means a contract by which one owning such property grants to another the right to possess, use and enjoy it for specified period of time in exchange for periodic payment of a stipulated price, referred to as rent"
"master lease": a main lease controlling subsequent leases or subleases.
"Net-net-net lease": lease in which the lessee pays all the expenses including mortgage interest and amortization leaving the lessor with an amount free of all claims.
Provided that in fact and in law the leased assets are trust assets and are limited to properties that qualify as real or immovable property of the trust, and that the business of the third party is not the business of the trustee thereby also being the business of the trust, in our view, the rent earned by the trust from the master lease on a net-net-net lease basis should generally qualify as rent from real or immovable properties. However, our conclusions may differ depending on the particular facts of any given situation. You may consider a request for an advance income tax ruling should you wish for more certainty in this regard.
(b) The definition of "rent from real or immovable properties" in subsection 122.1(1) excludes specifically rent based on profits. For instance, rent based on the business income of the tenant would not, in our view, qualify. However, rent received by a trust that is based on the percentage of the gross rents received by a lessee would in our view generally qualify as rent from real or immovable properties. Note however, that if the entitlement of the trust is to a percentage of an amount of gross rents received by the lessee, and that gross rent includes (in whole or in part) amounts that would not be "rent from real or immovable properties" as defined in subsection 122.1(1) to the lessee e.g., payments for the occupation of, use of, or right to use a room in a hotel or other similar lodging facility, the trust's revenues in respect of that lease would not, in our view, be rent from real or immovable properties within the meaning of the definition in subsection 122.1(1) to the lessor trust.
(c) Paragraphs (b) and (c) of the "real estate investment trust" ("REIT") definition require that 95% / 75% of the trust's revenues for the taxation year be derived from rent from real or immovable properties etc. In the draft legislation released on December 21 2006, these conditions required that the trust derive its income (rather than revenue) from specific sources. When a Notice of Ways and Means Motion was tabled on March 27, 2007, these two conditions were amended to replace an "income" test with a "revenue" test. This could be read as an indication that the legislator wished a revenue test, which appears, in our view, to refer more to the gross income of the entity. Accordingly, we consider the reference to "revenu" of the French version of the Act to refer to the revenue of the REIT.
Question 2- Rental income earned by a partnership
Whether its share of the revenues from a limited partnership (of which a trust is one of the limited partners) which would constitute "rent from real or immovable properties" pursuant to subsection 122.1(1) would retain its character as "rent from real or immovable properties" when allocated to the trust, in circumstances where the securities held in the limited partnership would be "real or immovable property" to the trust as defined in subsection 122.1 (1) of the Act?
Our comments
Subsection 96(1) requires that the income of a partner be computed as if the partnership were a separate person resident in Canada. A partnership initially computes its income or loss at the partnership level. Accordingly, a partnership's income is its net income computed in accordance with the Act. The member's share of the income or loss of the partnership from each source flows through to the individual member in accordance with paragraphs 96(1)(f) and (g) of the Act. Therefore, except in the computation of its income, a partnership is treated as a conduit, with its revenues being taxed in the hands of its partners and retaining its characteristics with respect to source and nature.
Consequently, provided that the partnership agreement does not contemplate the allocation of any amount to or in respect of any partner by source, we agree that the trust's revenues for purposes of paragraphs (b) and (c) of the definition "real estate investment trust" would be the revenues of the partnership (i.e., derived from the same sources), to the extent of the trust's profit (or loss) share for the year.
Question 3- Mortgage REIT
Whether a trust that invests solely in mortgages relating to immovable properties situated in Canada would qualify as a REIT pursuant to subsection 122.1(1)?
Our comments
As defined in subsection 122.1(1), a trust is a REIT for a taxation year if it is resident in Canada throughout the year and meets a number of conditions, including the requirement that, at no time in the taxation year, the trust holds non-portfolio property other than qualified REIT properties (paragraph (a)) and, the total FMV of all properties held by the trust being, inter alia, real or immovable property, is not less than 75% of the equity value of the trust at that time (paragraph (d)).
It is a question of fact whether or not a trust falls within the parameters of this definition. In a hypothetical situation, we are unable to offer definitive comments regarding the tax status of the trust without a complete description of the details of its organization and operation and without reviewing the pertinent agreements. However, it seems very unlikely that a trust holding only mortgages could meet the requirements described above.
Question 4- Trust-on trust structure
Whether on October 31, 2006, the top trust in a trust-on-trust structure would qualify as a REIT pursuant to subsection 122.1(1) in circumstance where the investments of the subsidiary trust would satisfy the conditions of the definition of REIT?
Our comments
Based on a change to the Act (2009, c. 2, s. 50(1), royal assent of Bill C-10 received on March 12, 2009), the definition of "rent from real or immovable properties" in subparagraph 122.1(1)(a)(iii) includes: "a payment that is included under paragraph 104(13)(a) in computing the recipient's income and that was made from the part of a trust's income (determined without reference to subsection 104(6)) that was derived from rent from real or immovable properties". As a result of this modification which is deemed to have come into force on October 31, 2006, where a trust that is a beneficiary of another trust, receives a payment from the other trust's income which is derived from rent from real or immovable properties, that payment would normally qualify for the purposes of the REIT revenue tests in subparagraph (b) and (c) of that definition, subject to the restrictions in paragraph (b) of the definition.
It would be a question of fact whether the top trust otherwise satisfies the requirements to be a "real estate investment trust" for the year within the meaning defined in subsection 122.1(1).
These comments are provided in accordance with paragraph 22 of Information Circular 70-6R5. We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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