Principal Issues: At what point in time does a contingent sale of a rental property take place?
Position: It is a question of law when the disposition of a particular property takes place
Reasons: similar comments given in previous document
2006-017186 XXXXXXXXXX G. Moore (613) 957-9232 April 26, 2006
Dear XXXXXXXXXX:
Re: Rental Purchase Agreement
This is in response to your letter of February 15, 2006, inquiring about your rental purchase agreement.
You have a residential property and you have given your tenants an option to purchase the property. The rent is $600 per month. You and your tenants have agreed that they will pay you $1,000 per month and $400 of this amount will be credited towards a downpayment. The selling price of the house is $142,500 and at the end of 24 months, the tenants will have a downpayment of $9,600 and a balance owing of $132,000. You are asking if the extra $400 per month should be considered to be part of the rental income and when the sale should be recognized.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
To determine the date on which a property is sold, it is necessary to examine the legal relationship that exists between the purchaser and the vendor. The basic rule is that property in respect of specific assets is sold at the time when parties to the contract intend it to pass, as evidenced by the terms of the contract, the conduct of the parties, and any other circumstances that may be relevant. For an unconditional contract of sale, the relevant date is usually when the contract is made. However, if the intention of the parties is not evident and there is a conditional contract of sale, the relevant date is normally when all the conditions have been satisfied. Paragraphs 17, 18, and 19 of IT-285R2, Capital Cost Allowance - General Comments, have additional information on this subject.
In your situation, there seems to be a conditional contract of sale, since the renters must raise sufficient funds for an initial deposit for the sale. This deposit may or may not be raised at a future date. Therefore, it is our view that the property will likely be disposed of as of the date this contingency is met and both parties enter into an irrevocable contract of sale. However, since this is ultimately a legal question that can only be resolved by examining the actual terms of the contract, we suggest that you consult with your legal advisor if you need assistance in establishing the date of sale.
You have also asked about the treatment of the extra $400 per month or $9,600 for two years. The tax treatment of the $400 per month would depend on the contractual relationship between the parties, as indicated above. The tax treatment of the amount would be affected by whether it is refundable or not refundable to the tenants if they do not purchase the property. If it is not refundable, it would likely be considered to be part of rental income, based on the facts you have provided.
We trust that these comments will be of assistance.
Yours truly,
Bob Skulski
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch