5 June 1998 Internal T.I. 9805726 - FUNDING ARRANGEMENTS-TENANTS & CHARITY

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 ISSUE:

Whether the receipt of a free rental accommodation in a seniors residential complex operated by a registered charity in exchange for an interest free loan to the registered charity is taxable in the hands of the tenant.

Position TAKEN:

The value of the rent foregone granted by a landlord in exchange for an interest-free loan from a tenant is generally subject to taxation in the hands of the landlord (section 9 of the Act) and the tenant (section 3 of the Act).

Reasons FOR POSITION TAKEN:

The receipt of a free rental accommodation in exchange for an interest free loan is a barter transaction. As indicated in paragraph 4 of IT-490 (copy enclosed), the Department considers barter transactions can result in income as contemplated by sections 3 and 9 of the Act.

			June 5, 1998

HEADQUARTERS HEADQUARTERS
Charities Division Income Tax Ruling and
Interpretations Directorate
Attention: Neil Barclay, Director P. Diguer
(613) 957-8953
7-980572

Advance income tax ruling request

We are writing in response to your memo dated March 5, 1998 in which you referred to a request (copy attached to your memo) (the “Request”) from a registered charity (the “Charity”) in connection with different options presently under consideration by it for the funding of new projects. In particular, the Charity is seeking a ruling in regard to the tax implications to tenants (targeted by the funding activities) of a seniors residential complex operated by the Charity. You request our views on the tax implications to the tenants and the Charity that would arise as a consequence of the funding arrangements.

Our views in regards to your request are set out in the following text which could be included in your reply to the Charity.

An advance income tax ruling is a written statement given by the Income Tax Rulings and Interpretations Directorate to a taxpayer stating how the Department will interpret and apply specific provisions of existing Canadian income tax law to a definite transaction or transactions which the taxpayer is contemplating. The Department charges a fee for this service. As indicated in Information Circular IC-70-6R3 dated December 30, 1996 (copy enclosed) , advance income tax ruling requests must include an advance payment equal to five hours of work (currently $90.00 per hour) plus GST ($481.50), copies of all relevant documents and contain the information set out in paragraph 16. Your request does not include any of the above mentioned material. Should you wish to proceed with an advance income tax ruling request please submit a request that complies with the requirements set out in IC-70-6R3. Nevertheless, we offer the following general comments in connection with your request which we hope will be of assistance to you.

Barter transactions

The receipt of a free rental accommodation in exchange for an interest free loan is a barter transaction. As indicated in paragraph 4 of IT-490 (copy enclosed), the Department considers barter transactions can result in income as contemplated by sections 3 and 9 of the Income Tax Act (Canada) (the “Act”). In arm’s length transactions, where an amount must be brought into income, that amount is the price which the taxpayer would normally have charged a stranger for his services or would normally have sold his goods or property to a stranger. Thus, the value of the rent foregone granted by a landlord in exchange for an interest-free loan from a tenant is generally subject to taxation in the hands of the landlord (section 9 of the Act) and the tenant (section 3 of the Act).

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

We hope our comments will be of assistance to you. If you have any questions concerning this matter please feel free to contact us.

for Director
Financial Industries Division
Income Tax Rulings &
Interpretations Directorate
Policy and Legislation Branch