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.
Principal Issues: Whether there is a deemed benefit for the difference between the fair market value rent of a unit and the amount that is currently paid under the "life lease arrangement"
Position: Yes.
JURISPRUDENCE: Villa Beliveau Inc. v. Canada, [2004] TCJ No.558 (affirm'd) 2006 FCA 153; Construction Berou Inc. v. The Queen, 99 DTC 5868.
XXXXXXXXXX 2006-018910
S. Lewis
September 28, 2006
Dear XXXXXXXXXX:
Re: Life lease arrangement
This is in response to your letter of May 30, 2006, inquiring about whether there is a taxable benefit as a result of the difference that exists between the fair market value rent of a unit and the amount of rent that is currently paid under a life lease arrangement.
We have the following understanding of the facts:
A life lease arrangement is entered into between an individual (the "Tenant") and a landlord building and operating a not for profit retirement housing complex (the "Housing Complex"). This arrangement involves two documents: a loan agreement (the "Loan Agreement") and a lease agreement (the "Lease").
Under the Loan Agreement the Tenant contributes an amount that represents a portion of the costs of construction of a particular unit that the Tenant will occupy (the "Unit"). The amount the Tenant loans the landlord is between 35% and 100% of the cost of constructing the Unit (the Unit's cost). The Loan Agreement stipulates that no interest will be payable by the landlord in respect of the loan. The landlord has the ownership of the Housing Complex.
The Tenant enters into a lease for the Unit and the Tenant's monthly rent is determined by adding the following two amounts:
- a monthly fee representing a proportionate amount of the Housing Complex's operating expenses pertaining to the Unit; and
- if the Tenant had not loaned the landlord 100% of the Unit's cost, an amount representing the interest and other charges in respect of the difference between the amount loaned and the Unit's cost.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
A barter transaction is effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money. A barter transaction may occur whether or not the parties are dealing at arm's length. In a barter transaction, between persons who are dealing with each other at arm's length, it is a fundamental principle that each of those persons considers that the value of whatever is received is at least equal to the value of whatever is given up in exchange therefore. A barter transaction can result in income or expense as contemplated by sections 3 and 9 of the Income Tax Act. For further comments regarding barter transactions please see Interpretation Bulletin IT-490.
It is our general view that a tenant who enters into a type of lease agreement with a landlord where the fair market rent is reduced in reference to an amount loaned at no interest involves a financing arrangement. This type of financing arrangement is considered a barter transaction because the tenant foregoes interest on the loan in exchange for a reduced rent. It is our general view that the tenant in this type of arrangement benefits in a similar way as in a situation where the amount loaned is interest bearing and results in income (taxable to the tenant) that is used to pay for the tenant's personal expenses (e.g., rental cost). Therefore, the tenant in this type of arrangement would have to include the reduction of the rent granted by the landlord in exchange for the interest-free loan in his/her income for tax purposes. In essence, it appears that the interest-free loan is a type of investment but its return is a reduction of rental costs.
Our views above are in line with those we previously expressed in the documents to which you made reference in your letter.
We trust that these comments will be of assistance.
Yours truly,
S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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