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 the income distributed by Sub-trust 2 to Sub-trust 1 and then by Sub-trust 1 to the Trust form part of the Trust's revenues for the taxation year derived from "rent from real or immovable properties" for the purposes of sub-paragraphs (b)(i) and (c)(i) of the definition of "real estate investment trust" in subsection 122.1(1) of the Act.
Position: yes
Reasons: income was derived from the rental of real or immovable properties held by Sub-trust 2.
XXXXXXXXXX
2010-038551
July 29, 2011
Dear XXXXXXXXXX ,
RE: Subsection 122.1(1) - Real Estate Investment Trust - Rent from Real or Immovable Properties
I am responding to your letter dated October 29, 2010 in which you requested our interpretation of sub-paragraph (a)(iii) of the definition "rent from real or immovable properties" in subsection 122.1(1) of the Income Tax Act (the Act"). You have provided the following hypothetical situation:
1. A mutual fund trust (the "Trust") holds all of the units of a unit trust ("Sub-trust 1")
2. Sub-trust 1 holds all of the units of a unit trust ("Sub-trust 2")
3. Sub-trust 2 holds real or immovable property as capital property from which it earns rent. Such rent is the only income earned by Sub-trust 2.
4. Sub-trust 2 distributes all of its rental income to Sub-trust 1 in the taxation year in which it is earned.
5. Sub-trust 1 distributes all of its income to the Trust in the taxation year in which it is earned.
Specifically, you have asked whether the income distributed by Sub-trust 2 to Sub-trust 1 and then by Sub-trust 1 to the Trust, form part of the Trust's revenues for the taxation year that are derived from "rent from real or immovable properties" for the purposes of sub-paragraphs (b)(i) and (c)(i) of the definition of "real estate investment trust" in subsection 122.1(1) of the Act.
Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning an advance income tax ruling, please refer to Information Circular 70-6R5 dated May 17, 2002. Where a situation involves a specific taxpayer and a completed transaction, the inquiry should be addressed to the relevant Tax Services Office, together with all relevant facts and documentation. However, we are prepared to offer the following general comments, which may be of assistance.
General Comments
A trust that is resident in Canada throughout the taxation year is a real estate investment trust if it meets the conditions provided in the definition of "real estate investment trust" in subsection 122.1(1) of the Act. Paragraph (b) of that definition states that not less than 95% of the trust's revenues for the taxation year must be derived from one or more of the following:
(i) rent from real or immovable properties,
(ii) interest,
(iii) capital gains from dispositions or real or immovable properties,
(iv) dividends, and
(v) royalties.
Paragraph (c) of the definition "real estate investment trust" states that not less than 75% of the trusts revenues for the taxation year must be derived from one or more of the following:
(i) rent from real or immovable properties,
(ii) interest from mortgages, or hypothecs on real or immovable properties, and
(iii) capital gains from dispositions of real or immovable properties.
"Rent from real or immovable properties" is defined in subsection 122.1(1). Included pursuant to sub-paragraph (a)(iii) of that definition, a payment that is included under paragraph 104(13)(a) in computing the recipient's income and that was made from the part of a trust's income (determined without reference to subsection 104(6)) that was derived from rent from real or immovable properties
Sub-paragraph (a)(iii) was added, in February 2009, to the definition of "rent from real or immovable properties" retroactive to October 31, 2006. The Department of Finance Technical Note states:
"Rent from real or immovable properties" is currently defined to include rent or similar payments for the use of, or the right to use, real or immovable properties, and payments for services ancillary to the rental of real or immovable properties and customarily supplied or rendered in connection with the rental of real or immovable property.
The definition is amended to include, as a taxpayer's rent from real or immovable property, a payment out of the current income of a trust, but only to the extent that the payment is included in the recipient trust's income and is paid from the part of the payer trust's income that was derived from rent from real or immovable properties."
To the extent that Sub-trust 1 includes in it's income under subsection 104(13) the revenue, net of Sub-trust 2's expenses, that was derived from rent from real or immovable properties of Sub-trust 2, it is our opinion that such revenue will be rent from real or immovable properties for the purposes of sub-paragraphs (b)(i) and (c)(i) of the definition real estate investment trust. As well, to the extent that the Trust includes in its income under subsection 104(13) the revenue, net of Sub-trust 1's expenses, that was derived from rent from real or immovable properties of Sub-trust 1, it is our opinion that such revenue will be rent from real or immovable properties for the purposes of sub-paragraphs (b)(i) and (c)(i) of the definition real estate investment trust.
On December 16, 2010 the Department of Finance released draft legislation to amend the Real Estate Investment Trust (REIT) Rules. Subsequent to the release of the draft legislation, Parliament was dissolved on March 26, 2011. Assuming the draft legislation is enacted in substantially the same form as proposed, the following proposed changes will affect the scenario provided in your letter:
- Sub-paragraph (a)(iii) of the definition "rent from real or immovable property" is repealed, and
- New subsections 122.1(1.1) and (1.2) are added.
In general, it is proposed that new subsections 122.1(1.1) and (1.2) provide that where an entity (parent trust) has an interest in another entity (subsidiary trust), and that interest is non-portfolio property of the parent trust, then the revenues that become payable by the subsidiary trust to the parent trust maintain their source characterization in determining the source of revenues for the parent trust. In other words, the income characterization remains the same when the revenue flows from the subsidiary trust to the parent trust.
If the proposed amendments are enacted, subsections 122.1(1.1) and (1.2) will apply to Sub-trust 1 and the Trust in the scenario provided in your letter, such that the income received by Sub-trust 1 from Sub-trust 2 will be rent from real or immovable property and the income received by the Trust from Sub-trust 1 will be rent from real or immovable property of the Trust for the purpose of the revenue tests found in sub-paragraphs (b)(i) and (c)(i) of the definition "real estate investment trust" in subsection 122.1(1) of the Act.
The above proposed changes would be effective for the 2011 and subsequent taxation years, and also on an elective basis for earlier taxation years.
As noted in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently, is not binding on the CRA in respect of any particular situation. However, we trust the comments will nonetheless be helpful.
Yours truly,
Roger Filion
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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