2018-0784661E5 Subsection 122.1(1) - Gross REIT revenue tests

Principal Issues: Can the following amounts received by the Partnership be excluded from “gross REIT revenue” as defined in subsection 122.1(1) of the Act? (1) Loans payable and equity contributions; (2) ITCs; (3) Rebates (such as volume discounts from suppliers and the HST Rebate)

Position: (1) Yes; (2) Yes, subject to caveat described below; (3) Yes, subject to caveat described below.

Reasons: (1) Loans and equity contributions would also not be considered revenue for purposes of the “gross REIT revenue” definition because these amounts could not be considered “revenue” within the ordinary meaning of the term nor under well-accepted principles of business and accounting practice. (2) and (3) ITCs, HST Rebates and volume rebates and discounts would not be considered “revenue” within the ordinary meaning of the term nor under the well-accepted business and accounting practices. For accounting purposes, such amounts would normally reduce the amount of the expense or the capital cost or adjusted cost base of the related property acquired. As a result, under the definition of “gross REIT revenue”, such amounts would indirectly be included in “gross REIT revenue” when the property is disposed of. In determining whether an entity meets the Gross REIT Revenue Tests, the entity must apply the above exclusions on a consistent basis to all sources of revenue.

Author: Monteith, Laura
Section: 122.1(1), 248(1), 9(1), 12(1)(a), 12(1)(b), 12(1)(x), 96(1), 108(2), 122.1(1), 122.1(1.1), 122.1(1.2) and (1.3), 132(6), 253.1(1), 248(16), 125.7(1), 20(1)(c)(i), Regulations 402(3) and 1102(16)

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                                                                                                     2018-078466 
                                                                                                     Laura Monteith

February 22, 2021

Dear XXXXXXXXXX:

Re: Technical Interpretation Request - Subsection 122.1(1) - Real Estate Investment Trust - Gross REIT revenue and Gross REIT revenue tests

This is in reply to your letter of November 2, 2018 in which you requested our comments in respect of the definition of “gross REIT revenue” under subsection 122.1(1) and paragraphs (b) and (c) of the definition of “real estate investment trust” (the “Gross REIT Revenue Tests”) in subsection 122.1(1) of the Income Tax Act (Canada) (the “Act”).

We apologize for the delay in responding to your request.

You have asked us to consider a situation in which a mutual fund trust (the “Trust”) holds a limited partner interest in a limited partnership (the “Partnership”).  The interest in the Partnership is “non-portfolio property” to the Trust as that term is defined in subsection 122.1(1).  The Partnership undertakes the development and construction of a new multi-unit residential rental property (the “Development Property”).  The development and construction of the Development Property is expected to be funded through equity contributions and loans to the Partnership.  The Partnership may receive rebates such as the following:

(1) Input tax credits (“ITCs”) in respect of GST/HST and volume discounts from suppliers during the development and construction.

(2) A GST/HST New Residential Rental Property Rebate (the “HST Rebate”) at the later of substantial completion and possession under first lease of the Development Property.

You have requested our views with respect to whether the following amounts received by the Partnership would be excluded from the determination of “gross REIT revenue” for the Partnership:

*     loan proceeds and equity contributions,
*     ITCs,
*     the HST Rebate, and
*     volume discounts and rebates from suppliers.

Our Comments:

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

In order to qualify as a REIT for a particular taxation year, the Trust must be resident in Canada and must satisfy the five tests set out in paragraphs (a) to (e) of the definition of “real estate investment trust” under subsection 122.1(1) (the “REIT Definition”).   

The Trust must satisfy paragraph (d) of the REIT Definition, which requires that throughout the trust’s taxation year, the total fair market value of certain qualifying properties – namely “real or immovable property” (as defined under subsection 122.1(1)) that is capital property and certain other listed properties - must equal at least 75% of the trust's equity value.  Subparagraph (a)(i) of the definition of “real or immovable property” includes a “security” (also defined under subsection 122.1(1)) that is held by the taxpayer (in this case, the Trust).  The security held by the Trust can either be; (1) a security of a trust that satisfies, or (2) a security of another entity that would, if it were a trust, satisfy the tests set out in paragraphs (a) to (d) of the REIT Definition.

The interest in the Partnership held by the Trust would be a “security” under paragraph (d) of the definition of “security”.  As such, the limited partnership interest could be considered “real or immovable property” of the Trust if the Partnership satisfies the tests set out in paragraphs (a) to (d) of the REIT Definition.  For this reason, the “gross REIT revenue” of the Partnership must be determined and the Partnership must also satisfy the Gross REIT Revenue Tests.

“Gross REIT revenue” of an entity for a taxation year is defined for purposes of sections 122.1, 104 and 122, as: “the amount, if any, by which the total of all amounts received or receivable in the year (depending on the method regularly followed by the entity in computing the entity's income) by the entity exceeds the total of all amounts each of which is the cost to the entity of a property disposed of in the year.”

In our view, “gross 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. 

In determining whether an entity meets the Gross REIT Revenue Tests, the entity must apply the above exclusions on a consistent basis to all of its sources of revenue.

We trust our comments will be of assistance.

Yours truly,

Steve Fron, CPA, CA, TEP
Manager, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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