| 921691 | |
| Glen Thornley | |
| (613) 957-2101 |
24(1)
Attention: 19(1)
September 1, 1992
Dear Sirs:
Re: Amortization of Prepaid Rent by Landlord
This is in reply to your letter of May 15, 1992 in which you ask that we confirm that a reasonable reserve in the case of a landlord receiving 60 years prepaid rent for a 60 year rental lease would be to recognize the prepaid rent over the period of the 60 year lease.
Assurance as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is outlined in Information Circular 70-6R2, published by Revenue Canada, Taxation on September 28, 1990. If you wish to obtain binding commitment with respect to an actual case with facts similar to your example, an advance income tax ruling application should be submitted. Questions regarding completed transactions or referrals of documents related to completed transactions should be referred to your local District Taxation Office.
Although we are unable to provide any binding assurance with respect to the query you have raised, we do provide the following general comments for your information.
Our Comments
In addition to the references set out in your letter, that of question 2 in the 1989 Corporate Management Tax Conference and paragraph 8 of Interpretation Bulletin IT-154R, the Department's position with respect to the amortization of prepaid rent is set out in paragraphs 9 and 10 of IT-261R under the sub-heading, "Landlords". There it states the following:
"9. Where a landlord receives a prepayment of rent which represents income from a business, he must include the full amount of the prepayment in computing his income for the year of receipt by virtue of paragraph 12(1)(a). However he may claim a reserve for a reasonable amount pursuant to subparagraph 20(1)(m)(iii). The reasonable amount for this purpose at the end of a taxation year would be that part of the rent received in advance, and included in the income of the taxpayer for that year or a prior taxation year, which relates to the period of time after the end of the year for which the possession or use of the property must be made available.
10. Where a landlord receives a prepayment of rent which represents income from property (rather than income from a business) and reports his income on an accrual basis, in accordance with generally accepted accounting practice there will be included in computing income for a particular taxation year only that portion of the rent prepayment that is for the use or possession of the rented property for that year. Any balance of the prepayment and any expenses relating thereto would, of course, be reflected in computing income for the particular taxation years to which they relate."
Although your proposal to recognize the prepaid rent in your hypothetical situation over the period of 60 years would appear to conform to the Department's published position in IT-261R and the other two indicated references, a definitive reply to your requested confirmation cannot be given without access to the lease agreement and other pertinent information. Whether the prepayment is "rent" or is more correctly characterized in some other way will depend on all the circumstances. For example, if the prepayment were in fact in respect of the sale of a leasehold interest, the Department's position on pre-paid rent would have no application.
Note that the foregoing comments are an expression of opinion based on the limited information provided. These comments are not an advance income tax ruling and are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch