July 20, 1988
Rulings Directorate Financial Industries Division Leasing & Financing Section R.P. Laramy (613)957-2746 SUBJECT: Disposition of a leasehold interest and a right of first refusal
We are writing in reply to your memorandum of May 6, 1988.
The situation as we understand
XXXX
You treated the XXXX and cited Interpretation Bulletin 359R2 as your authority for doing so. However XXXX. You have requested that we provide a ruling on this matter.
You previously discussed this file with the Hotline Section on May 3, 1988 and have forwarded this memorandum to us on their advice.
We offer the following comments.
(1) The "amount paid" by XXXX (i.e. his cost) for the land and building is equal to the value of the assets that he gave up in exchange, minus the cash he received as part of the transaction. In arm's length situations, where the value of the assets disposed of is impossible or difficult to ascertain, it may be appropriate to use the value of the assets acquired for determining the cost of acquisition. Such treatment is consistent with Interpretation Bulletin 490, which discusses the Department's views on the income tax implications arising from barter transactions.
(2) Where a taxpayer has a leasehold interest and a right of first refusal in respect of the same property, they usually represent distinct legal interests in that property. Accordingly, if they are disposed of they would usually be treated separately for income tax purposes.
Among other things, Interpretation Bulletin 359R2 outlines the correct tax treatment of amounts received prior to May 23, 1985 for surrendering a leasehold interest. Such amounts are capital receipts unless the renting of property forms part or all of the taxpayer's business, in which case they would be income receipts. However, amounts received prior to May 23, 1985 for surrendering a right of first refusal could be an income receipt based on the usual capital versus income criteria even if the renting of property does not form part or all of the taxpayer's business. This type of amount is not specifically provided for in Interpretation Bulletin 359R2.
(3) Where a taxpayer disposes of a leasehold interest and acquires a "replacement property" the "exchange of property" rules in the Act may apply if the taxpayer so elects. These rules may apply in XXXX case, and accordingly you may wish to consider their potential application.
We trust this information will be of assistance to you.
We have enclosed herewith the documents that were attached to your memorandum.
Section Chief Leasing and Financing Section Financial Industries Division Rulings Directorate
Enclosures