Principal Issues: A trust holds non-portfolio property consisting of apartment buildings and land that is used as a manufactured home community. Would supporting infrastructure, including sewers and roads, be qualified REIT property of the trust?
Position: It is a question of fact. General comments.
Reasons: "Qualified REIT property" of a trust is defined to include a "real or immovable property" held by the trust. It also includes a property held by a trust that is ancillary to the earning by the trust of "rent from real or immovable properties" or capital gains from the disposition of such properties.
XXXXXXXXXX 2007-025586
April 15, 2009
Dear XXXXXXXXXX :
Re: Qualified REIT Property - Roads and Sewers
This is in reply to your letters of October 12 and December 12, 2007 concerning the potential application of the SIFT rules to a publicly-traded trust that holds non-portfolio property consisting of apartment buildings and land that is used as a "manufactured home community" (MHC). An MHC, in this regard, means a land lease community arrangement under which a trust owns land and a supporting infrastructure, including utility connections, streets, lighting, driveways, common area amenities and other capital improvements, and tenants own mobile units that are their own homes situated on the lots that have been leased from the trust.
The specific concern you have raised is whether the infrastructure ancillary to the apartments and the MHCs, i.e., sewers and roads that are included in class 8 and 17 respectively of Schedule II to the Income Tax Regulations ("Schedule II") owned by the particular trust would be "qualified REIT property" of the trust pursuant to the definition in subsection 122.1(1) of the Income Tax Act ("the Act"). You confirm that the apartments are included in Class 1 of Schedule II.
As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments which may be of assistance.
Pursuant to paragraph (a) of the definition "qualified REIT property" in subsection 122.1(1), a real or immovable property held by the trust is a qualified REIT property. Pursuant to paragraph (b) of the definition "real or immovable property" in subsection 122.1(1), depreciable property is not real or immovable property unless it is property included (otherwise than by an election permitted by regulation) in Class 1, 3 or 31 of Schedule II, a property ancillary to the ownership or utilization of such property, or a lease or leasehold interest in respect of land or such property. In our view, an interest in a sewer and road acquired to service an apartment could be viewed as property held ancillary to the ownership of that apartment. As such, depending on the circumstances, such property could constitute real or immovable property within the meaning of this definition.
Pursuant to paragraph (d) of the definition "qualified REIT property", a property held by a trust that is ancillary to the earning by the trust of "rent from real or immovable properties", as defined in subsection 122.1(1), or capital gains from dispositions of such properties is a qualified REIT property. As such, sewers and roads located on land that is used as a MHC would be qualified REIT property if the trust held such property and it is ancillary to the trust earning rent from real or immovable properties or capital gains from dispositions of such properties. Notably, "rent from real or immovable properties" is defined to include both rent for the use of 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 properties. However, pursuant to paragraph (b) of that definition, neither payments for certain types of services, nor rent based on profits is rent from real or immovable properties. As such, it will be question of fact whether amounts received from tenants of MHCs would, in whole or part, be rent from real or immovable properties.
We would note that, pursuant to paragraph (d) of the definition "real estate investment trust" in subsection 122.1(1), the fair market value of all the properties of a trust that is a real estate investment trust, each of which is a real or immovable property, indebtedness of a Canadian corporation represented by a bankers' acceptance, property described by either paragraph (a) or (b) of the definition "qualified investment" in section 204, or a deposit with a credit union would, at each time in the taxation year, be equal to or greater than 75% of the equity value (as defined in subsection 122.1(1)) of the trust at that time in the year. Such property would generally not include a property that is a qualified REIT property only because it is a property held by the trust that is ancillary to its earning of rent from real or immovable properties or capital gains from dispositions of such properties.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments will be of assistance.
Robin Maley
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch