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.
Principal Issues:
Whether amount received to terminate a rental revenue guarantee agreement pursuant to which vendor of property guaranteed minimum rent is taxable.
Position:
Amount likely taxable.
Reasons:
If compensation is received for the failure to receive a sum of money that would have been an income item if it had been received, the compensation will likely be an income receipt.
5-952959
XXXXXXXXXX C. Chouinard
Attention: XXXXXXXXXX
March 1, 1996
Dear Sir:
Re: Settlement Payment
We are writing in reply to your letters of May 9, 1995 and July 3, 1995, addressed to the XXXXXXXXXX Taxation Services Office, wherein you inquire about the tax status of an amount received by a corporation as a result of the termination of a Revenue Guarantee Agreement between the corporation and another corporation.
We understand the facts to be as follows: in January 1993, the corporation entered into an agreement of purchase of sale with another corporation (the "Vendor") for the purchase of commercial condominium units. As part of that agreement, the Vendor provided a rental revenue guarantee, effective for two years, pursuant to which, if the rent during any 12 month period was less than $336,000, the Vendor would make up the shortfall. In March 1994, a Release and Settlement Agreement was entered into between the corporation and the Vendor whereby the Revenue Guarantee Agreement was terminated and the Vendor released of its obligations under that agreement in consideration of the payment by the Vendor of $120,000. You have indicated that the payment was consideration for giving up your rights under the Revenue Guarantee Agreement and you inquire whether this amount would be taxable.
As indicated in paragraph 8 of Interpretation Bulletin IT-365R2, a copy of which is enclosed, an amount received by a taxpayer in lieu of the performance of the terms of a business contract by the other party to that contract may, depending on the facts, be either an income or capital receipt. If the receipt relates to the loss of an income-producing asset, it will be considered to be a capital receipt; on the other hand, if the compensation was received for the failure to receive a sum of money that would have been an income item if it had been received, the compensation will likely be an income receipt.
Since it is not clear to us why a rental revenue guarantee was provided by the Vendor and also why the Vendor was released of its obligations under the Revenue Guarantee Agreement, we cannot determine conclusively whether the payment received would be in the nature of capital or income. However, given that the Revenue Guarantee Agreement amounts to a guarantee by the Vendor of the rental revenue from the units, it is likely that the amount received would be an income receipt.
In addition, since the settlement amount was received in March 1994, we question your suggestion that the corporation could avoid its tax liability in respect of the amount received by paying the amount to the shareholders as interest on their loans. In order to be deductible under paragraph 20(1)(c) of the Income Tax Act, interest must be paid in the year or payable in respect of the year, depending upon the method regularly followed by the taxpayer in computing its income, pursuant to a legal obligation to pay interest. Since no deduction for interest appears to have been claimed for the January 16, 1994 to January 15, 1995 taxation year, it is questionable that the corporation had a legal obligation to pay interest in respect of the shareholder loans. Accordingly, in our view, since the interest was neither paid nor apparently payable for the taxation year of the corporation that ended on January 15, 1995, it is not open to the corporation to claim a deduction for interest for that year.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Encl.
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