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: Valuation of Subsection 15(1) Benefit Renovations by Tenant to Shareholder's Property
This is in reply to your memorandum of July 8, 1991 wherein you requested our opinion on the effects that one or more lease option periods would have on the valuation of a shareholder benefit where additions or improvements have been made by a corporation to a building owned by a shareholder thereof and leased to the corporation.
XXX
Our Comments
XXX If, on the other hand, the landlord does not have the right to increase the amount of the rent to reflect the increased value of the premises at the time that the options are exercisable then such options would be relevant in determining the value of the landlord's reversionary interest in the property, unless there is some substantive evidence to indicate that the options will not be exercised.
With respect to the factors raised on page 2 of your memorandum as to why only one option period should be recognized, we offer the following comments:
- 1. The inclusion of only one option period for purposes of calculating the capital cost allowance on a class 13 asset is a legislated requirement which is found in subparagraph 3(b) of Schedule III. No such legislative provision exists for purposes of valuing a shareholder benefit in these circumstances.
- 2. Where the lease is subsequently cancelled or altered to favour the shareholder, could the subsequent cancellation or alteration not be considered to be a benefit conferred on the shareholder at that time.
- 3. We agree that the provisions for the extension of the lease is only one of the factors to be considered in calculating the amount of any shareholder benefit. It must, however, be considered.
In order to satisfy the Department's position, as expressed in paragraph 17 of IT-432R, all of the relevant facts related to each particular situation, including all of the lease option periods, must be reviewed and considered in the valuation of the amount of any shareholder benefit pursuant to subsection 15(1) of the Act. Ultimately, we believe that the decision to utilize none, one or all lease option periods in the calculation of the shareholder benefit pursuant to subsection 15(1) of the Act can only be determined by the valuations expert subsequent to a review of all of the relevant facts.
We trust the foregoing comments will be of assistance to you.
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