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 trust earns income through a subtrust, what amount, if any, would be viewed as the trust's revenues for the year derived from capital gains from dispositions of real or immovable properties for purposes of paragraphs (b) and (c) of the definition "real estate investment trust" in subsection 122.1(1), if the subtrust makes a designation in respect of the trust pursuant to subsection 104(21)?
Position: In the circumstances described in the opinion, the trust's revenues derived from capital gains from dispositions of real or immovable properties would include the portion of the net taxable gains of the subtrust in respect of which the subtrust has made a valid designation in respect of the trust pursuant to subsection 104(21) for the year. The trust's revenues derived from capital gains from dispositions of real or immovable properties would also include amounts that the subtrust has made payable to it in the year in respect of the non-taxable portion of capital gains that were realized by the subtrust from dispositions of real or immovable properties.
Reasons: To the extent that a valid designation is made in respect of the taxable portion of a capital gain under subsection 104(21) in respect of the trust, the amount is deemed to be a taxable capital gain for the year of the trust from the disposition by the trust of capital property and as such, is not deemed by subsection 108(5) to be income from an interest in the subtrust and not from any other source. The trust's revenues in respect of the designated amount are derived from capital gains from dispositions of the particular properties in respect of which the subtrust realized capital gains. Similarly, to the extent that the subtrust has made amounts payable to the trust in the year in respect of the non-taxable portion of capital gains realized by the subtrust from dispositions of real or immovable properties, the trust's revenues in respect of the amounts would be derived from capital gains from dispositions of the particular properties in respect of which the subtrust realized the capital gains.
XXXXXXXXXX
2010-036821
November 1st, 2010
Dear XXXXXXXXXX :
Re: Subsection 122.1(1) - "real estate investment trust"
This is in reply to your letter of May 20, 2010 requesting our views as to what the CRA would regard to be the revenues of a real estate investment trust, derived from amounts described in paragraphs (b) and (c) of the definition "real estate investment trust" in subsection 122.1(1) of the Act, where the trust earns the amounts through a subtrust in the following hypothetical situation:
1. A mutual fund trust (the trust) is the sole beneficiary of a unit trust (the subtrust).
2. The subtrust holds real or immovable properties from which it earns rent.
3. The subtrust realizes a capital gain in the year from the disposition of real or immovable properties.
4. The subtrust allocates all of its income to the trust for the year, and designates the taxable portion of the capital gain in respect of the trust pursuant to subsection 104(21) of the Act.
5. The subtrust distributes the entire amount of the gain to the trust.
We acknowledge the additional information you provided to us on August 31, 2010 and our conversations in respect of this question (Maley/XXXXXXXXXX ).
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Where a situation involves a specific taxpayer and a completed transaction, the inquiry should be addressed to the relevant Tax Services Office, together with all relevant facts and documentation.
However, we are prepared to offer the following general comments, which may be of assistance. These comments are based on the hypothetical facts you have posed, and in particular should not be construed as reflecting the CRA's views in circumstances where a trust arrangement provides for or permits the streaming of certain types of revenues or income to particular beneficiaries.
Pursuant to the definition "real estate investment trust" in subsection 122.1(1), a trust that is resident in Canada throughout the taxation year is a real estate investment trust if
(a) the trust at no time in the taxation year holds any non-portfolio property other than qualified REIT properties;
(b) not less than 95% of the trust's revenues for the taxation year are derived from one or more of the following:
(i) rent from real or immovable properties,
(ii) interest,
(iii) capital gains from dispositions of real or immovable properties,
(iv) dividends, and
(v) royalties;
(c) not less than 75% of the trust's revenues for the taxation year are derived from one or more of the following:
(i) rent from real or immovable properties,
(ii) interest from mortgages, or hypothecs, on real or immovable properties, and
(iii) capital gains from dispositions of real or immovable properties; and
(d) at each time in the taxation year an amount, that is equal to 75% or more of the equity value of the trust at that time, is the amount that is the total fair market value of all properties held by the trust each of which is real or immovable property, indebtedness of a Canadian corporation represented by a bankers' acceptance, property described by either paragraph (a) or (b) of the definition "qualified investment" in section 204, or a deposit with a credit union.
As the subtrust is deemed to be in respect of the subtrust property a separate individual for purposes of the Act, the trust's revenues from the subtrust would be net of the subtrust's expenses. Pursuant to subsection 108(5) of the Act, any amount that is included by the trust in its income under subsections 104(13) or (14) of the Act, or under section 105, is deemed to be income from an interest in the subtrust, and not from any other source, except as otherwise provided under Part I of the Act. As such, it is our view that the revenues of the trust would be derived from its interest in the subtrust to the extent that the amount was included in its income under any of those subsections, except as otherwise provided under Part I of the Act.
To the extent that the subtrust has made a valid designation in respect of the taxable portion of a capital gain in respect of the trust pursuant to subsection 104(21) of the Act, the amount is deemed for purposes of sections 3 and 111 (except as they apply for purposes of section 110.6, and subject to paragraph 132(5.1)(b)), to be a taxable capital gain for the year of the trust from the disposition by the trust of capital property. Consequently, the designated amount is not deemed by subsection 108(5) to be income from an interest in the subtrust and not from any other source. The designated amount, in our view, would reasonably be viewed as derived from capital gains from dispositions of the particular properties in respect of which the subtrust realized the capital gains.
Where the revenues of the trust include an amount payable by the subtrust in respect of the non-taxable portion of a capital gain realized by the subtrust from dispositions of real or immovable properties, subsection 108(5) of the Act generally would not apply to deem the trust to receive that amount as income from an interest in the subtrust and not from any other source. It is our view that such revenue amounts would be derived from capital gains from dispositions of the particular properties in respect of which the subtrust has realized the capital gains.
As noted in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently, is not binding on the CRA in respect of any particular situation. However, we trust that the comments will nonetheless be helpful.
Yours truly,
Robin Maley
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory
Affairs Branch
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