11 September 2006 Roundtable, 2006-0185661C6 - 2006 STEP Conference -Question 13

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.

Principal Issues: Can you give an update on CRA's current assessing position with respect to Canadian corporations which hold U.S. real estate which is personal use property (such as a Florida Condominium used as a residence by the Shareholders)?

Position: ITTN#31R2 sets out the requirements to be eligible for the transitional relief under which a 15(1) benefit will not be assessed in respect of a shareholder's use of corporate real estate located in the U.S. Since the release of ITTN#31, the CRA has confirmed that the transitional relief for property transferred to a spouse as a consequence of death will also apply to the transfer of property to a post-71 spousal or common-law partner trust as a consequence of death. The CRA also confirmed that the transitional relief would not be available in the situation where the shareholder who contributed the property redeems his shares such that the remaining shareholders have use of the property.

Reasons: In the second scenario, the requirements set out in ITTN#31 are not met.

2006 STEP Round Table
Q13. Single Purpose Corporations

Can you give an update on CRA's current assessing position with respect to Canadian corporations which hold U.S. real estate which is personal use property (such as a Florida Condominium used as a residence by the Shareholders)?

Response

Subsection 15(1) provides for the taxation of a benefit from the shareholder's use of the property of a corporation. Prior to 2004, the CRA had an administrative position under which the 15(1) benefit was not taxed in a very narrow set of circumstances relating to the holding of U.S. real estate in a single-purpose corporation

As set out in Income Tax Technical News #32, the implementation of the CRA's current position as announced in Income Tax Technical News #31R2 (ITTN#31R2) relating to the assessment of taxable benefits derived when a single-purpose corporation holds U.S. real estate was deferred until January 1, 2005 in order to facilitate the administration of our new position.

The administrative practice of not assessing a subsection 15(1) benefit will continue to apply to those arrangements that were in place on or before December 31, 2004 until the earlier of:

• the disposition of the particular U.S.-based real estate by the single-purpose corporation; or
• a disposition of the shares of the single-purpose corporation, other than a transfer of such shares to the shareholder's spouse or common-law partner as a result of the death of the shareholder.

Since the implementation of our current position, we have received very few questions concerning the position set out in ITTN#31R2. We have been able to confirm that the transitional relief, described as the exception in the second bullet above, will continue to apply if the shares of a single-purpose corporation are transferred to a spousal trust, rather than directly to the spouse, following the death of the shareholder.

We were also asked whether the administrative practice of not assessing a subsection 15(1) benefit will continue to apply in view of the transitional relief described in ITTN #31R2 in a situation where the single purpose corporation redeems all the shares of its capital-stock owned by the individual who had contributed the funds to acquire the property, leaving the children of the individual as the shareholders of the single-purpose corporation. In such a situation, the administrative practice would not be available in respect of the benefit enjoyed by the remaining shareholders following the redemption of the shares of the individual who contributed the funds to acquire the property. However, if the remaining shareholders had incorporated a new company before January 1, 2005 and that new corporation had used funds provided solely by those shareholders to acquire the property from the existing corporation before January 1, 2005 on a fully taxable basis, that is, without the use of any of the rollover provisions of the Act, the administrative practice and the transitional relief described in ITTN#31R2 would be available provided that the corporation otherwise qualifies as a single purpose corporation.

In addition to meeting the requirements set out in ITTN#31R2 to be eligible for the transitional relief, the administrative practice concerning single purpose corporations only applies where the following seven conditions were met at all times:

1. The corporation must be a Canadian corporation within the meaning of subsection 89(1) of the Act.

2. The corporation's only objective is the holding of a residential real property in the U.S. for the personal use or enjoyment of the shareholder.

3. The shares of the corporation are held by an individual or an individual and persons (other than a corporation) related to the individual.

4. The only transactions of the corporation relate to its objective of holding property in the U.S. for the personal use or enjoyment of the shareholder.

5. The shareholder is charged with all the operating expenses of the property by the corporation, with the result that the corporation shows no profit or loss with respect to the property on any of its income tax returns.

6. The corporation acquired the property with funds provided solely by the shareholder and not by virtue of his holdings or that of a related person in any other corporation.

7. The property must be acquired by the corporation on a fully taxable basis, that is, without the use of any of the rollover provisions of the Act.