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: Is there an interest income inclusion to the tenant where the tenant receives a rent reduction as a result of a capital support payment in respect of a "Life Lease Agreement"?
Position: YES
Reasons: Considered a financing arrangement.
2006-017123
XXXXXXXXXX C. Tremblay, CMA
(613) 957-2139
November 22, 2006
Dear XXXXXXXXXX:
Re: Life Leases
This is in response to your letters of February 13 and July 10, 2006, wherein you requested a technical interpretation of the consequences under the Income Tax Act associated with the life lease agreement (the "Life Lease Agreement") provided to us. You advise that one of your clients is considering entering into such a Life Lease Agreement with new residents in a planned new building.
You advise that your client is a non-profit organization set up to provide low cost housing for senior citizens. A new building is being constructed and your client hopes to have residents of the new building enter into Life Lease Agreements. You have also provided us with the draft agreements and documents that are being proposed. You specifically asked us for our views of the tax consequences of the life lease capital payments ("Life Lease Capital Payment") contemplated under the proposed Life Lease Agreement.
Facts
Under the terms of the proposed Life Lease Agreement, the residents are granted the right to occupy their housing units until the expiry date specified in the agreements. The Life Lease Agreement will also specify a normal monthly "market" rent for their unit.
Residents have the option of making a Life Lease Capital Payment to the non-profit organization. This payment is fully refundable to the resident on termination of the Life Lease Agreement. Making a Life Lease Capital Payment entitles the resident to a reduction in the rent otherwise payable on their unit. The reduction in their rent will be equal to the proportion of rent otherwise payable that the amount of the Life Lease Capital Payment is of the fair market value of the housing unit.
Residents will pay separately for the regular operating and maintenance costs (including gas, hydro, air conditioning, property taxes, hot water and appliances) for their unit.
It is proposed that construction of the new building will be financed by loans from financial institutions and by financing provided by the new residents by the Life Lease Capital Payments. The financial institutions will require that the residents agree in writing that the financial institution will have priority over the residents in regard to the repayment of their mortgage ahead of the repayment of any Life Lease Capital Payments.
If the owner defaults on any of its obligations to the financial institution, the resident must begin paying full market rent on their unit, regardless of whether they made a Life Lease Capital Payment on the initial lease of their unit.
You advise that that residents typically move from their own homes to an organization's facilities when they are no longer able to care for themselves in their own homes. At this time many seniors typically sell their homes and their unit becomes their new "principal residence". You state that the bulk of the funds received in the form of the Life Lease Capital Payments will come out of proceeds received on the sale of the resident's principal residences and these funds were not otherwise earning taxable income in the resident's hands. Accordingly, in your view, there should not be a requirement for the residents to report rent reduction in their income for income tax purposes.
The particular situations in your letter relates to factual ones, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. However, we are prepared to provide the following general comments, which may be of assistance.
Before an individual can claim to own a leasehold interest in a property, there must be a contract of lease creating such an interest. The question then arises as to whether a particular agreement constitutes a contract of lease. An examination of the relevant documents is of importance in making such a determination, and in our view, the proposed Life Lease Agreement included in your enquiry, does not create a leasehold interest. You argued that because many seniors typically sell their homes, their unit becomes their new "principal residence". However, a review of the documents submitted with particular attention to the clauses that require the repayment of the Life Lease Capital Payment to the resident, the prohibition of the resident to sublease or assign, support our opinion that the residents are tenants and do not have a leasehold interest. It appears that the Life Lease Agreement is nothing more than a financing arrangement.
In our opinion, this type of financing arrangement gives an advantage to the resident who enters into a Life Lease Agreement and makes a Life Lease Capital Payment. If a similar amount were loaned by an individual who also is a tenant, as an interest bearing debt obligation to a deposit taking institution, the interest income would result in taxable income in the hands of the individual who then could use the income to pay for his/her non-deductible personal expenses (e.g. the cost of occupying the rental unit). It follows that where an amount is loaned to an organization, the interest income on the loaned funds would be taxable to the person who earned the interest on that income.
In our view, the type of financing arrangement being considered in the case at hand is a barter transaction because the tenant foregoes interest on the loan in exchange for a reduced rent. Therefore, in our view, a resident who enters into a Life Lease Agreement by making a Life Lease Capital Payment to the owner-landlord would have to include the reduction of the rent granted by the owner-landlord in exchange for the interest-free loan in his/her income for income tax purposes. In our view, the interest-free loan is a type of investment and its return is a reduction of rental costs, in lieu of interest. Such investment return is nevertheless taxable.
Further, in our view, the owner-landlord should prepare a T-5 information return and report the rent reduction as investment income to the resident in every year the resident receives a rent reduction as a result of having made a Life Lease Capital Payment.
However, should a resident be required to pay full-market rent because the owner has defaulted on any of its obligations to the financial institution, there would be no income inclusion to be reported by the resident who made a Life Lease Capital Payment beginning at the time the tenant begins to pay full-market rent.
We trust our comments are of assistance.
Yours truly,
R.A. Albert, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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