Rick Campbell (613) 993-5937
XXXX
January 23, 1985
Dear Sirs:
This is in reply to your November 28, 1984, request for a technical interpretation in respect of the application of paragraph 20(1)(z) of the Income Tax Act (Canada) (the "Act").
The situation as you explained it is as follows:
1. A purchaser enters into an agreement with an arm's length registered owner of real property (the "vendor") to purchase the vendor's interest in certain premises comprising land and buildings which is subject to a lease (the "Freehold Agreement"). The purchaser's obligation to complete the Freehold Agreement is conditional upon the purchaser entering into an agreement, on terms satisfactory to the purchaser, to purchase the tenant's leasehold interest. The closing of the Freehold Agreement is also conditional upon the tenant being ready, willing and able to close and convey the leasehold title to the purchaser immediately following the close of the Freehold Agreement. Either of the conditions may be waived by the purchaser. The title to the real property is expressly stated to be subject to the leasehold interest.
2. The purchaser enters into an agreement with the tenant to purchase the tenant's leasehold interest (the "Leasehold Agreement"). The completion of the Leasehold Agreement is conditional upon the purchaser entering into an agreement, on terms satisfactory to the purchaser, to purchase the vendor's freehold interest. The closing is also subject to the Freehold Agreement having been completed and title to the freehold having been acquired by the purchaser.
3. The purchaser anticipates that both the Freehold Agreement and the Leasehold Agreement will be entered into concurrently. On closing of the Freehold Agreement, the purchaser will acquire title to the freehold interest, subject to the lease. Immediately thereafter, the purchaser shall pay an amount to the tenant for cancellation of the lease pursuant to the Leasehold Agreement, and the tenant shall deliver to the purchaser a valid surrender of the lease. The purchaser intends to thereafter occupy the premises and to carry on its business from there.
It is our opinion that provided the closing of the Freehold Agreement precedes the closing of the Leasehold Agreement, so that at the time of payment the purchaser is the owner of the freehold, the purchaser, in accordance with the provisions of paragraph 20(1)(z), is entitled to deduct the amount paid to the tenant for the cancellation of the lease.
As you are no doubt aware, the above is an opinion and as such is not binding on the Department.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch