7 June 1999 External T.I. 9833425 - INTEREST FREE LOAN - FREE RENT -BARTER

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether free rent in exchange for an interest free loan is taxable in the hands of the tenant.

Position: The value of the foregone rent is taxable.

Reasons: Barter transaction

XXXXXXXXXX 					983342
B. Kerr
Attention: XXXXXXXXXX 

June 7, 1999

Dear Sirs:

Re: Interest Free Loan & Free Rent

This is in response to your letter of December 10, 1998, concerning a situation involving an interest free loan.

You have described a situation where seniors will make interest free loans to a registered charity in exchange for free rent in a seniors apartment building that will be constructed and operated by the charity. You have requested that the Department confirm that there would be no adverse tax consequences to the seniors or the charity.

Our Comments

The situation outlined in your letter involves an actual fact situation. As it relates to a proposed transaction, assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular IC 70-6R3 dated December 30, 1996, issued by Revenue Canada, Taxation. However, we can offer he following general comments.

The receipt of a free rental accommodation in exchange for an interest free loan is a barter transaction. As indicated in paragraph 4 of Interpretation Bulletin IT-490, the Department considers that barter transactions can result in income as contemplated by sections 3 and 9 of the Income Tax Act (the “Act”). In arm’s length transactions, where an amount must be brought into income, that amount is the price which the taxpayer would normally have charged to a stranger for his goods or services or would normally have sold his goods or property to a stranger. Thus the value of the rent foregone granted by the landlord in exchange for an interest-free loan from a tenant is generally subject to taxation in the hands of the landlord under section 9 of the Act and the tenant under section 3 of the Act.

With respect to the charitable status of the landlord under paragraph 149(1)(f), the Department would have to examine all of the facts of a particular situation. For example, although you have indicated that the organization in question is a registered charity, you have not identified whether it is a charitable organization or a charitable foundation under subsection 149.1(1) of the Act. In this regard we would need more information about the organizations charitable purposes and charitable activities. Should you wish to pursue this matter, we suggest you contact Mr. Neil Barclay, Director, Charities Division at 1-800-267-2384 or 1-613-954-0410.

We trust that these comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch