Section 122.1

A mutual fund trust is the limited partner in a subsidiary partnership which is undertaking the development and construction of a new multi-unit residential rental property, funded with equity contributions and loans. Would the rebates, addressed below, be gross REIT revenue? CRA responded:

“[G]ross REIT revenue” would exclude amounts that are loan proceeds and equity contributions to the extent that they do not constitute consideration to which the entity expects to be entitled in exchange for goods or services, or as income arising in the course of the entity’s activities. We note that loan proceeds and equity contributions would not normally be considered as revenue within the ordinary meaning of the term nor under well-accepted principles of business and accounting practice.

For accounting purposes, ITCs, the HST Rebate and volume discounts and rebates from suppliers would normally reduce the amount of the expense or the capital cost or adjusted cost base of the related property. ITCs, the HST Rebate and volume rebates and discounts from suppliers would not be considered “revenue” within the ordinary meaning of the term nor under the well-accepted business and accounting practices. Accordingly, “gross REIT revenue” would exclude amounts received or receivable on account of a taxpayer’s expenditures that are: (i) volume discounts and rebates, received by the taxpayer because these are adjustments to amounts of expenditures, and (ii) government assistance, such as ITCs and the HST Rebate, which reduce the capital cost or adjusted cost base of the related property.

S. 69(11) can apply to deem a taxpayer which thought it disposed of property on a rollover basis to have received higher proceeds of disposition (without explicitly deeming the taxpayer to have received those additional deemed proceeds) whereas the replacement property rollover in s. 44 potentially applies to "an amount that has become receivable by a taxpayer." CRA stated: "while subsection 69(11) does not specifically deem the taxpayer to have an amount receivable as proceeds of disposition… CRA will generally accept that this will not, in and by itself, prevent a taxpayer from making [the replacement property] election."

See summary under s. 44(1).

The definition of "specified foreign property" in s. 233.3 excludes in para. (j) thereof a partnership interest where the property of the partnership "is used or held exclusively in the course of carrying on an active business of the…partnership." CRA considered that this exclusion likely did not apply for a foreign partnership that held Bitcoins and engaged in related FX hedging and arbitrage transactions. See summary under s. 233.3 – "specified foreign property."

Current structure

The Trust, a closed-end listed mutual fund trust which is intended to qualify as a REIT and indirectly owns retail, commercial and industrial properties in Canada and the U.S., is the sole limited partner of Partnership and has a 100% interest in the general partner. The Trust previously received 2011-0429611R3.

Formation of New LP and site acquisition

Partnership and "Developer Partner" (a partnership of corporations unaffiliated with Trust) will form "New LP" under the provisions of a provincial Partnership Act for the purpose of acquiring the "Target Site" (by prepaying the ground rents for the site) and developing it for ultimate use as a rental property. The each will own ½ of the common shares of the "Project General Partner" of New LP and subscribe for an equal number of LP units.

Development and financing

Pursuant to a Development Agreement with New LP, Developer Partner will develop the property in consideration for stipulated fees and "DevCorp" will provide development administrative services to New LP for fees. The Partnership will be required to guarantee a construction loan to New LP (the "Guarantee"), and will receive periodic guarantee fee equal to a percentage of the Construction Loan principal. Trust will provide the balance of the financing required by New LP through a revolving credit facility (the "Mezzanine Loan"), secured by a second collateral leasehold real property mortgage. The Mezzanine Loan (as well as the LP units of New LP held by Partnership) will have a fair market value greater than 10% of the equity value of New LP.

After lease-up

New LP will not earn any revenue until the first tenant commences paying rent, following which it will earn rents, together with interest on bank deposits (not exceeding XX% of its revenues).

Rulings

Application of revenue tests (paras. b and (c)) where nil revenue

Assumptions made in connection with rulings that the Mezzanine Loan and LP interest in New LP of Partnership will qualify in a particular taxation year as real or immovable property to Partnership or Trust, as the case may be, pursuant to subparagraph (a)(i) of the definition of "real or immovable property" include that in the year New LP does not earn any gross REIT revenue or its only gross REIT revenue is rents and interest not exceeding 25% of its gross REIT revenue.

Guarantee as non-NPP

The giving of the Guarantee for a fee will not, by itself, be the carrying on of a business by Partnership, and the right to the Guarantee fee would not be property of Partnership described in paragraph (c) of the definition "non-portfolio property". If at any time the right to the Guarantee Fee is property described in paragraph (a) of the definition "non-portfolio property," that right would be qualified REIT property of Partnership, provided that the New LP satisfies the REIT tests.

Where a subtrust has allocated to a trust a taxable capital gain of $50 under s. 104(21), the trust will be considered to have derived a capital gain of $100 from the particular subtrust properties which were disposed of. S. 108(5) does not apply to a taxable capital gain that has been designated under s. 104(21), and in fact both $50 amounts would be derived from the disposition of the particular properties in question.

Where a trust was a limited partner, its share of the revenues of the partnership would be revenues of the trust for purposes of paragraphs (b) and (c) of the definition of "real estate investment trust" to the extent of its "profit (or loss) share for the year" in question, given that "a partnership is treated as a conduit, with its revenues being taxed in the hands of its partners and retaining its characteristics with respect to source and nature."

A mutual fund trust (the “Trust”) holds a limited partner interest in a limited partnership (the “Partnership”) which, in turn, holds numerous multi-residential rental apartment buildings as capital property. One such property contains fully-furnished units for which there is a single unallocated charge for use and occupancy of the unit. Is the full amount of the rent received for such furnished units “rent from real or immovable properties”? CRA responded:

We have assumed … that in the above described situation, the furnishings provided in the rental units consists of furnishings typically or usually found in a residence. In such case … the entire amount of the rental payments can be considered to be “rent from real or immovable properties” … .

A net lease of a hotel or retirement residence by a trust to an arm's length operator thereof generally would qualify as giving rise to qualifying rents .

However, a percentage participation under the lease in the gross revenues of the tenant would cause all of the rents of the landlord trust to not qualify as "rent from real or immovable properties", if such revenues of the tenant did not themselves qualify as "rent from real or immovable properties", eg., revenues for the use of hotel rooms.

Partnership, which effectively is wholly-owned by a REIT (the ‘Trust,") and "Developer Partner" (a partnership of corporations unaffiliated with the Trust, will form "New LP" for the purpose of acquiring and developing a site for ultimate use as a rental property. They each will own ½ of the common shares of the "Project General Partner" of New LP and subscribe for an equal number of LP units. Upon lease-up, New LP will be able to exercise the "Call Right" to acquire the LP units of Developer Partner, and Developer Partner (if the Call Right is not exercised) will have the right to exercise the "Put Right" to sell those units to New LP, in either case, at fair market value.

Rulings

Include that the Call and Put rights will not be "securities," as defined in s. 122.1(1), of the Developer Partner.

See detailed summary under s. 122.1(1) – real estate investment trust.