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.
Decision Summary
6061-2 W.H. Cooper
July 2, 1986
Reference: Paragraph 13(21)(c) - "disposition of property"; subsection 13(21.1)
Issues: 1. Does the execution of a 99 year lease creating the legal relationship of lessor and lessee constitute a disposition for the purposes of the Act where the lease grants the lessee an option to purchase the leased premises at any time after year 81 for an amount which has a nominal present value?
2. Does the right to demolish any structure on such leased premises constitute a disposition upon the execution of the lease? If not, would a disposition to which subsection 13(21.1) of the Act applies be considered to occur upon the demolition of any such structure?
Position: 1. The execution of a lease agreement which, as a matter of private law, creates a legally binding relationship of lessor and lessee does not constitute a "disposition" within the meaning of paragraph 13(21)(c) - "disposition of property", notwithstanding the granting of a purchase option to the lessee at an option price with a nominal present value.
2. The granting of a right to demolish a building on leased premises under the terms of the lease does not constitute a disposition of that building by the lessor. However, the subsequent demolition of the building would be a dis- position of property under paragraph 13(21.1)(b) of the Act.
Comments: 1. Publications Division is in the process of revising IT-233R and has been advised that certain comments in that bulletin are incorrect to the extent they suggest that a lease can be considered a "sale" for tax purposes. They have also been advised that the appropriate distinction to make is one of lease vs. disposition/acquisition rather than that of lease vs. sale.
2. In this particular fact situation, subsection 13(21.1) of the Act did not apply as the building, which was demolished in 1985, was considered to have been so disposed of "pursuant to the terms of an agreement in writing entered into on or before" November 12, 1981. Although the lease did not place a positive obligation on the lessee to demolish the building, the lease clearly granted the lessee a right to do so. As the lease was executed in 1980, subsection 13(21.1) was not considered to apply.
3. This type of lease, a "Ground Lease", has recently become quite popular. Presumably one of the main features is the avoidance of a taxable gain on this form of property "conveyance" whether on the execution of the lease or the demolition of the landlord's existing building.
Chief Leasing and Financing Section Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
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