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:
Treatment of payment made by a tenant to landlord which is the Crown and used by the Crown to make specific major improvements to property leased from the Crown.
Position:
Not a gift and not a current operating expense.
Reasons:
Not a gift as tenant enjoys an enduring benefit in the form of improved premises for the duration of the lease. Not a current operating expense because it is capital in nature. Could be a depreciable property, leasehold interest, described in Class 13 of Schedule II of the Income Tax regulations, depending on how the project is financed.
970615
XXXXXXXXXX A.M. BrakeAttention: XXXXXXXXXX
October 6, 1997
Dear Sirs:
Re: Improvements to Leased Crown Property
This is in reply to your letter of February 27, 1997, requesting our comments on the treatment of costs relating to a situation where a tenant leases a portion of a building owned and operated by XXXXXXXXXX. We apologize for the delay in responding.
In the scenario that you presented, the tenant intends to contribute a substantial amount of money to the Crown. The funds are to be used to make significant improvements to the building owned and operated by the Crown. The tenant intends to suggest how the contribution is to be used (i.e., identify the suggested areas of improvement). Your view is that the funds given to the Crown should be treated as a gift to the Crown as a result of enhancing the value of the Crown property. Alternatively, should it not be viewed as a gift, you feel that it would constitute a current operating expense in accordance with subsection 9(1) and paragraph 18(1)(a) of the Income Tax Act (the "Act"). It is your further view that it would not be denied by paragraph 18(1)(b) of the Act as the expenditure is not in respect of the acquisition of a "capital property" as defined in section 54 of the Act. You have stated that since the improvements to the building will be significant, they could not be construed as repairs and maintenance.
The situation outlined appears to involve a series of actual proposed transactions. It is the practice of this Department to comment on such transactions only by way of advance ruling. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R3 for the procedure to be followed. Although we are unable to provide an opinion in respect of the specific transactions described in your letter, we have set out some general comments.
The word "gift" is not defined in the Act and therefore assumes its common law meaning. A gift can be said to have been made when property is voluntarily transferred from a donor to a donee who receives the property given. The transfer may not result directly or indirectly in a right, privilege, material benefit or advantage to the donor or to anyone designated by the donor. As set out in paragraph 15(f) of Interpretation Bulletin IT-110R3, Gifts and Official Donation Receipts, a charity may not issue an official income tax receipt if the donor has directed to give funds to a specific person or family. However, donations subject to a general direction in respect of the particular program of the charity are acceptable provided no benefit accrues to the donor and does not benefit non-arm's length persons. As well, decisions regarding the utilization of the donations within the program must remain the exclusive responsibility of the donee. These same principles are reflected in Income Tax Ruling ATR-63.
With respect to the situation outlined above, it is our view that the contribution would not be considered to be a gift as not all of the requirements are met. Directing that the money be used to provide something for the benefit of the donor, goes beyond "general direction" as to the purpose to which the donee can make a donation. Also, a transfer of property in exchange for other consideration does not constitute a gift, notwithstanding that the landlord is the Crown, as the tenant in return will enjoy the benefit of better improved accommodations. This in fact appears to be the motivating factor and underlying purpose of the proposed contribution.
We would also like to refer you to paragraph 5 of Interpretation Bulletin IT-464R, CCA - Leasehold Interests, which, in part, states: "The capital cost of a leasehold interest of Class 13 includes an amount that a tenant expends in respect of improvements or alterations to a leased property that are capital in nature,..." Generally, an expenditure is considered to be of a capital nature when an enduring benefit ensues, as distinct from a current operating expense where the benefit is restricted to the current accounting cycle. In our view, the expenditure to improve leased premises generally creates an enduring benefit by virtue of the fact that the occupant enjoys better accommodation for several years, possibly for the duration of the lease, and is, therefore, capital in nature. It should be noted, on the other hand, that paragraph 7 of IT-464 states that a leasehold interest does not include alterations or improvements made by the landlord at the request of the tenant. Unfortunately, we are unable to provide definite comments on this aspect without a review of all the facts and proposed transactions, including a review of the leasing and financing arrangements between the landlord and the tenant.
We trust our comments will be of assistance but would caution you that they do not constitute an advance income tax ruling and, accordingly, are not binding on the Department with respect to any particular transaction.
Yours truly,
John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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