29 January 1997 External T.I. 9636475 - LEASEHOLD INTEREST

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:

1)Whether a disposition of a leasehold interest would be capital gain
2)Whether a leasehold interest in land is depreciable property

Position:

1)Question of fact - Could be capital gain or business income if renting property forms part or all of a business being carried on.

2)Provided a capital cost has been incurred, the leasehold interest would be a class 13 asset provided the leasehold was acquired for purpose of gaining or producing income and was not a prepayment of rent.

Reasons: ITA

XXXXXXXXXX 963647

Attention: XXXXXXXXXX

January 29, 1997

Dear Sirs:

Re: Leasehold Interest

This is in reply to your letter of October 25, 1996 in which you request a technical interpretation with respect to the acquisition price for a long-term land lease.

The situation described in your letter appears to be an actual fact situation and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Where a completed transaction is involved, the enquiry should be addressed to your local District Tax Services Office. Consequently, we can only offer the following general comments.

A leasehold interest is the interest of a tenant in any leased tangible property. A tenant who leases property acquires a leasehold in that property regardless of whether or not any capital cost is incurred in respect of that interest. As noted in paragraph 9 of Interpretation Bulletin IT-464R, a lessee is considered to have disposed of a leasehold interest at the time of an assignment of the lease or a partial disposition when the lease is subletted. On the disposition of the leasehold interest by the lessee, any proceeds of disposition received will be capital proceeds or business income if renting property forms part or all of a business being carried on, provided the amount is not a payment in lieu of rent or a prepayment of rent.

With respect to the acquisition price for a long-term land lease, it is our opinion that an amount a tenant pays to obtain a sublease is a capital expenditure to acquire property that is a leasehold interest. The tenant may be able to claim capital cost allowance on the amount of this payment, provided the leasehold interest was acquired for the purpose of gaining or producing income and was not a payment in lieu of rent or a prepayment of rent.

We trust our comments will be of assistance to you.

Yours truly,

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