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: Where a tenant, who lives in and operates a sole proprietorship from a leased housing unit, receives an amount due to the early termination of their residential lease is the amount received on account of income or capital?
Position: It is received on account of capital. The resulting capital gain may qualify for the principal residence exemption pursuant to 40(2)(b).
Reasons: The amount is a capital receipt received as replacement for the loss of a capital asset (the leasehold interest in a housing unit). The leasehold interest being disposed of may qualify as the principal residence of the individual on the basis that the property is so designated for the relevant years with respect to the formula set out in paragraph 40(2)(b) of the Act assuming the other relevant provisions of the definition of a principal residence have been met.
XXXXXXXXXX 2007-025472
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: Advance Income Tax Ruling
Lease Termination Payment
XXXXXXXXXX
We are replying to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling with respect to the proposed settlement for an amount on account of the early termination of your tenancy agreement. We also acknowledge the additional information provided to us during our various telephone conversations (XXXXXXXXXX).
We understand that to the best of your knowledge none of the issues described herein is:
a. in an earlier tax return of you or a related person;
b. being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of you or a related person;
c. under objection by you or a related person;
d. before the Courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; nor
e. the subject of a ruling previously issued.
Our understanding of the facts and proposed transactions is as follows:
Facts
1. You presently reside in, and are a party to the tenancy agreement for, XXXXXXXXXX (the "Building"), XXXXXXXXXX (the "Suite") in XXXXXXXXXX in the Province of XXXXXXXXXX within the jurisdiction of the tax services office at XXXXXXXXXX and your taxation centre is in XXXXXXXXXX.
2. You currently lease two residential suites in the Building, XXXXXXXXXX (the "Bachelor") (approximately XXXXXXXXXX ft2 for $XXXXXXXXXX per month) and the Suite (approximately XXXXXXXXXX ft2 for $XXXXXXXXXX per month).
3. You resided in the Bachelor from XXXXXXXXXX to XXXXXXXXXX following which you have resided in the Suite. Since moving to the Suite on XXXXXXXXXX, you have either left the Bachelor empty or sublet it at no profit. A small portion of your personal furniture and belongings are stored in the Bachelor. You do not make any profit from retaining the Bachelor.
4. When you entered into the tenancy agreement for the Suite, you had neither a primary nor secondary intention of selling it at a profit.
5. The tenancy agreement is neither for the purchase of the Suite nor for a loan.
6. You do not own the Suite.
7. You do not own any housing unit.
8. You are self-employed, XXXXXXXXXX and, in the previous XXXXXXXXXX years, have deducted the following amounts on your Statement of Professional Income:
a. Approximately $XXXXXXXXXX annually as "rent" which is consistent with being approximately XXXXXXXXXX% of the Suite's lease expense.
b. Approximately $XXXXXXXXXX annually as "telephone/utilities".
c. No amount as capital cost allowance on the Suite.
9. The Building is undergoing condo-conversion.
10. The tenants of the Building are entitled to remain in their respective rented units indefinitely provided they remain current with respect to their rental payments.
11. The owners of the Building have offered to terminate the tenancy agreement with respect to the Suite early so that you will vacate the Suite, enabling them to convert it into a condominium that they can renovate and sell.
12. You reached a settlement with the owners of the Building with respect to XXXXXXXXXX in accordance with the draft minutes of settlement and consent ("Minutes of Settlement and Consent").
13. The terms of the Minutes of Settlement and Consent, among other matters, are that you will vacate the Suite by XXXXXXXXXX, and the owners of the Building will compensate you by way of the following:
a. $XXXXXXXXXX in consideration for your delivery of vacant possession of the Suite,
b. $XXXXXXXXXX on account of your moving expenses,
c. $XXXXXXXXXX on account of your accounting, administration and legal costs, and
d. forgoing the payment due ($XXXXXXXXXX) on account for the Suite for the month of XXXXXXXXXX.
14. The owners of the building will make the above payments to you by way of a certified cheque made out to you or by the transfer of funds to your legal representative, in trust for you.
15. You have recently agreed to accept an offer from the owners of the Building relating to the early termination of the tenancy agreement for the Bachelor. Currently, your expectation is that the owners of the Building will compensate you by way of XXXXXXXXXX months rent ($XXXXXXXXXX), in consideration for your delivery of vacant possession of the Bachelor on or before XXXXXXXXXX.
Proposed Transactions
16. You propose to enter into the Minutes of Settlement and Consent containing, among other matters, the provisions set forth in 13 above.
17. You will receive the compensation noted in 13 above. In particular, you will receive the $XXXXXXXXXX noted in 13(a) above in accordance with 14 above.
Purpose of the Proposed Transactions
18. The purpose of the proposed transactions is for the owners of the Building to terminate the tenancy agreement with respect to the Suite enabling them to renovate it and sell it as a condominium and to provide for the payment of an amount to you in respect of such early termination.
Ruling
Provided that the above-mentioned facts and proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions, that the final Minutes of Settlement and Consent are substantially the same as the documents provided to us, and that the transactions are carried out as described herein, we confirm that the $XXXXXXXXXX amount to be received by you, noted in 13(a) and 17 above, is a capital amount to be received as replacement for the disposition of a capital asset (the leasehold interest in a housing unit).
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, dated May 17, 2002, issued by the Canada Revenue Agency (the "CRA"), and is binding on the CRA provided the Minutes of Settlement and Consent are executed on or before XXXXXXXXXX.
In our view, for each year of your tenancy of the Bachelor (XXXXXXXXXX ) and the Suite (XXXXXXXXXX), one of these leasehold interests in a housing unit being disposed of may qualify as your principal residence for that year on the basis that for each year, one of the Bachelor or the Suite is so designated with respect to the formula set out in paragraph 40(2)(b) of the Act, provided that the other relevant provisions of the definition of a principal residence have been met for the leasehold interest in a housing unit so designated for that year.
Nothing in this letter should be construed as implying that the CRA has reviewed or is making a determination or ruling in respect of:
(a) the fair market value of any of the amounts referred to herein;
(b) certainty as to the qualification of the Suite as your principal residence; nor
(c) any tax consequences in relation to any facts or Proposed Transactions referred to herein other than those specifically described in the ruling given.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2008
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2008
Email this Content