15 November 1999 External T.I. 9924585 - PREPAID RENT&SALE OF BUILDING

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: (i) The effect of a subsection 20(24) election where an amount is paid by a seller of a property to compensate the buyer for assuming lease obligations for which the seller has received prepaid rent. (ii) The income tax treatment where an amount is not paid but the purchaser pays less than fair market value for the property.

Position: (i) The amount may be deducted by the seller under 20(24) and must be added to the income of the buyer under 12(1)(a). (ii) The difference between the FMV of the property and the amount paid by the purchaser must be included in the purchaser's income under 9(1) or 12(1)(x).

Reasons: (i) Based on the words in 20(24). (ii) The difference may be considered as an amount received by the purchaser to reduce the future expenses with respect to the lease.

XXXXXXXXXX 	J. Gibbons
		5-992458
Attention: XXXXXXXXXX 

November 15, 1999

Dear XXXXXXXXXX:

We are replying to your letter of September 9, 1999, in which you requested our views concerning the income tax consequences in a situation where a taxpayer has disposed of property and prepaid rent in respect of that property has been received.

As requested, we have considered your situation and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments are of a general nature only.

You describe the following hypothetical situation:

• A Canadian corporation (Aco) owns a property (the "property") consisting of land and building.
• The property is leased by Aco to another Canadian corporation (Tco).
• Tco has prepaid rent to Aco in the amount of $20. This amount is included in computing the income from Aco's rental operations.
• For internal corporate reasons, Aco will transfer the property to a related corporation (Bco).
• The property has a fair market value of $100 without regard to the rental prepayment.

Scenario 1

• Aco will transfer the property to Bco for consideration of $100.
• Aco will pay Bco $20 for assuming the lease obligation.
• Aco and Bco will file an election under subsection 20(24) of the Income Tax Act.

Your Views:

1. The proceeds of disposition for Aco and the cost of acquisition of the property for Bco will be $100.

2. Aco will be entitled to a $20 deduction under subsection 20(24) in computing its income from rental operations.

3. Bco will have to include $20 in income under paragraph 12(1)(a) for the year of acquisition and will be entitled to a deduction for an appropriate reserve under paragraph 20(1)(m).

Scenario 2

• Aco will sell the property to Bco for consideration of $80 cash.
• No election under subsection 20(24) will be filed.

Your views

The proceeds of disposition of the property for Aco and the cost of acquisition of the property for Bco will be $100, which consists of the $80 in cash and the assumption by Bco of the obligations with respect to the prepaid rent.

Our views

Your questions are very similar to the those addressed in Technical Interpretation #9909965. In that letter, we addressed the income tax consequences of the sale of a property for which "pre-paid rent" covering a period of 20 years was received. Our view expressed therein was that prepaid rent for such a long period may be considered proceeds of disposition, rather than a prepayment of rent, and a review of all of the facts and circumstances was required in order to make a conclusive determination. Accordingly, we had to presume, for purposes of finalizing our reply, that prepaid rent was for a shorter period and was not proceeds of disposition. We will have to make the same presumptions in this letter. On that basis, and assuming that the amount paid by the taxpayer to the purchaser for the assumption of the lease obligations is reasonable, so that the election under subsection 20(24) is applicable, we agree with your understanding of the income tax consequences in scenario 1.

In scenario #2, i.e., where an election is not filed, we agree with your conclusions concerning the proceeds of disposition of the property for Aco and the cost of acquisition of the property for Bco. We also note our view in these circumstances that the excess of the fair market value of the property over the price paid by Bco, i.e., $100 minus $80, must be included in Bco's income by virtue of subsection 9(1) or paragraph 12(1)(x) of the Act. In our view, this amount may be considered as an amount received by the purchaser to reduce the future expenses with respect to the lease.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate

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