6 February 1996 External T.I. 9529455 - LIFE LEASES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Whether the right to occupy a unit of a housing project purusant to a life lease will qualify as a leasehold interest for the purposes of the principal residence definition contained in Section 54 in the event of the disposition of the life lease so that paragraph 40(2)(b) may be applicable to exempt all or a portion of the gain.

Position TAKEN:

Question of fact - Will probably qualify if the agreement is a bonafide contract of lease creating a leasehold interest.

Reasons FOR POSITION TAKEN:

Departmental Position, Previous correspondence

									952945
XXXXXXXXXX							D. Zion

Attention: XXXXXXXXXX

February 6, 1996

Dear Sirs:

Re: Life Leases

We are writing in response to your letter of November 6, 1995 wherein you request a technical interpretation confirming whether or not the right to occupy a unit of a housing project under a life lease would qualify as a principal residence pursuant to section 54 of the Income Tax Act (the "Act") in the event of a subsequent sale of the life lease.

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the related special release issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer some general comments.

As we understand the situation, a non-profit organization (the "organization") will own a building in which a number of housing units for seniors will be created. In order to occupy a housing unit in the building an individual would enter into a life lease with the organization. The life lease would permit the individual to occupy a specific housing unit in the building for life in exchange for a lump sum prepayment and monthly fees. The lump sum prepayment would be based on the cost of putting up the building. The rent or monthly fees charged to the individual would be calculated in order to defray as nearly as possible the estimated cost of financing and operating the building including maintenance, taxes, repairs, etc. The individual would pay monthly charges equal to such actual cost which would most likely represent less than the amount for which such units would otherwise rent.

Before an individual can claim to own a leasehold interest in a property, there must be a contract of lease creating such an interest. The question then arises as to whether a particular agreement constitutes a contract of lease. An examination of the relevant documents is of importance in making such a determination, none of which have been provided to us. Accordingly, we are not in a position to comment on whether the proposed "life lease" is a bona fide contract of lease creating a leasehold interest. It may be that a particular "life lease" agreement is nothing more than a financing arrangement, in which case the income tax consequences could only be determined from a thorough review of all the documents. However, it is our opinion that if the agreement is a bona fide contract of lease then the lessee would be considered to own a leasehold interest in a housing unit and accordingly, the individual will be considered to have owned a principal residence for the purpose of the definition of "principal residence" in section 54 of the Act. It would follow that, upon the sale of the life lease, the related capital gain would be exempt 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.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch