7 October 1990 Income Tax Severed Letter - Cape Breton Investment Tax Credit

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.

Subject: Cape Breton Investment Tax Credit Regulation 4605(c)

This is in reply to your memorandum dated July 10, 1990 concerning the Cape Breton Investment Tax Credit (the "CBITC").

Your opinion of the Department's position in the context of a leasing arrangement, is that "taxpayer", as the term is used in paragraph 4605(c) of the Income Tax Regulations (the "Regulations") refers to the lessee who is to provide facilities primarily for the receiving, storage, and distribution of goods owned by persons with whom the lessee deals at arm's length.

Our understanding of a typical scenario that is of concern to you is that in many cases XXX has granted a certificate to a lessor/owner (for the purposes of the definition of "approved project property") in respect of a building that was leased to a lessee who used it to receive, store and distribute his own goods. Based on the use of the building by the lessee it would appear that the lessor may not have been entitled to the CBITC. However, the owner argues that since the building, in that particular case, was "rented" by the occupant rather than "leased" to him, it would meet the requirements of paragraph 4605(c) of the Regulations and qualify for the CBITC as an "approved project property" under subsection 127(9) of the Income Tax Act (the "Act").

In addition, you raised the following questions.

• (a) What is our interpretation of "lease arrangement" referred to in our memorandum of December 28, 1988 and also of "facilities, receiving, storage, distribution" and "persons" as contained in paragraph 4605(c) of the Regulations.
• (b) Does the renting of separate compartments of a building on a monthly basis to private individuals to store their personal effects, i.e., car, furniture, qualify under Regulation 4605(c) as a prescribed activity?

Our comments are as follows:

• 1. Based on the definitions of the terms "lease", "lessee", "tenant" and "rent" given by the Black's Law Dictionary, it is our view that the leasing of property to a lessee under a leasing arrangement for the purposes of the definition of "approved project property" under subsection 127(9) of the Act would be no different to the renting of property by a tenant under a rental arrangement. The Dictionary defines:

a "lease" as any agreement which gives rise to a relationship of landlord and tenant or lessor and lessee. Conveyance of interest in property for specified period usually in consideration of rent,

a "lessee" as one who rents property from another. In the case of real estate the lessee is also known as the tenant. He to whom a lease is made,

a "tenant" as one who holds lands or tenements by any kind of right. One who has use and occupation of real property of a landlord ... the terms of this tenancy being fixed by a "lease", and

"rent" as consideration paid for use or occupation of any property, land, buildings, equipment, etc.

In any event, if the building was acquired to be "rented" by the owner and this term could not be interpreted to mean "leased", the building would not qualify for the CBITC as an "approved project property" since the wording of this definition requires that the property be acquired "to be leased" by the owner.

• 2. On the basis of the above dictionary definitions a lease arrangement, for the purposes of the definition of "approved project property", could be considered, in our view, to include an arrangement between a landlord and a tenant which results in the use of real property for a specified period of time for consideration that is rent.
3. In the absence of a definition of the terms "facilities", "receiving", "storage" and "distribution" by the Act or the Regulations, they must therefore, be given their ordinary dictionary meanings. "Person" is, however, defined under 248(1) of the Act. The dictionary defines "facilities", among other things, as:
• • equipment or physical means for doing something,
• • something that is built or installed ... to serve a particular purpose.

Whatever the facilities consist of, be they entire buildings, rooms or compartments thereof, it is clear from the wording of paragraph 4605(c) of the Regulations that they must be used primarily to receive, store, and distribute goods of arm's length third parties.

• 4. It is our view that the use of the facilities by the lessee to store primarily his goods for the duration of the term of the lease would not constitute a "prescribed activity" for the purposes of paragraph 4605(c) of the Regulations and subparagraph (e)(iii) of the definition of "approved project property" under subsection 127(9) of the Act. However, since "primarily" has been defined as "chiefly" or "principally" and, with regard to use, "more than 50% of the time", the use of the facilities could still be a prescribed activity where the storing by the lessee of his own goods occupies less than 50% of the time. See paragraph 16 of IT-331R which discusses the determination of the "primarily" test with regard to the use of a building.
• 5. The undertaking of the plan to "use" a building by a lessor would presumably form part of any lessee's obligations under the terms of the lease and a certificate could be issued by the "Minister" (as the term is described in the definition of "approved project property") based on his judgment as to whether or not the would-be lessee

"can reasonably be expected to use the building pursuant to a plan to use it ... for an approved purpose in an approved project".

Based on the authority granted to the Minister in the words of the definition under subsection 127(9) to issue a certificate, it appears that a lessor to whom such a certificate had been granted in the circumstances described above would be entitled to the CBITC unless the certificate was subsequently revoked.

XXX Consequently, for the purposes of the "primarily" test, it is our view that in all cases it would be necessary to determine the extent of the activities carried on by the lessee or lessees of the building or parts thereof. Also, for the purposes of a request to XXX or decertification of the particular building, it should be determined, firstly, what the "approved purpose" was stated to be, as described under the plan, and then it should be stated clearly that there was a deviation from that plan pursuant to paragraph 127(11.3)(b).

• 7. Generally, it is also our view that if the stated purpose was to store (receive and distribute) the lessee's goods and the lessor obtained a certificate on that basis, it may not be possible to revoke the certificate. Even if the plan called for storage by the lessee of the goods of a third party but the plan did not specify that this would remain forever as the only use of the building, a change of use from the stated qualifying purpose to a non-qualifying purpose at a later date would not seem to provide grounds for a revocation. In this kind of scenario retroactive revocation would be harsh and it is unlikely that it should be attempted unless it was really a part of a fraudulent scheme.

We trust that our comments will be of assistance.