1 February 2000 External T.I. 1999-0011055 - SINGLE PURPOSE CORPORATION

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: Transfer of shares of a single purpose corporation.

Position: Transfer to surviving spouse (Cdn. resident) as a consequence of the shareholder's death is generally acceptable as long as 7 conditions continue to be met but inter vivos transfers are not permitted.

Reasons: Administrative practice only - will not be expanded to cover situations that it was not intended to cover.

XXXXXXXXXX 		1999-001105

Attention: XXXXXXXXXX

February 1, 2000

Dear Sirs:

Re: Single Purpose Corporations

This is in reply to your facsimile letter of April 30, 1999, wherein you requested our views on the continuing status of a corporation as a "single purpose corporation" under the Income Tax Act (the "Act").

In your letter you refer to a corporation which holds U.S. residential real property which has been funded by advances to the corporation by the shareholder. You then describe three situations where the ownership of the shares of the corporation and the debt owing to the shareholder are transferred to the shareholder's spouse. In the first situation, in the event of the death of the sole shareholder the shares and the debt outstanding at that time will become property of the shareholder's spouse under the terms of the shareholder's will. In the second situation the shareholder will transfer, inter vivos, 50% of the shares and debt outstanding at that time to his/her spouse and in the third situation the shareholder will transfer, inter vivos, 100% of the shares and debt outstanding at that time to his/her spouse.

Your question is whether any of the above transfers will cause the corporation to lose its status as a single purpose corporation.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. Although we are not able to comment specifically on the situation described in your letter we can offer the following comments.

The term "single purpose corporation" is not a defined term for the purposes of the Act but rather is a term used to describe a corporation that where certain conditions are met, the shareholder will not be subject to a shareholder benefit being imposed under subsection 15(1) of the Act that would otherwise apply. In our response to Question 12 of the 1998 APFF congress we outlined what those conditions are and indicated that we have not completed our study as to whether we will permit the continued use of single purpose corporations nor had we decided on what, if any, grandfathering protection would be granted to the shareholders of such corporations if the administrative practice is to be eliminated.

As you may know the issue came under study as a result of the changes to the Canada-United States Income Tax Convention (the "Treaty") brought about by the Third Protocol thereto. This protocol came into effect on November 9, 1995 and the provisions relating to U.S. estate taxes can be found in Article XXIX B of the Treaty. Article XXIX B of the Treaty generally results in significant reductions to, or in many cases complete exemption from, the U.S. estate tax that would otherwise be exigible. Paragraph 6 of Article XXIX B of the Treaty requires Canada to provide a foreign tax credit against Canadian taxes payable on U.S. source income with respect to U.S. estate taxes payable. This now eliminates the double taxation concern that originally lead to our administrative practice. While our administrative practice, as described below, remains in effect until this study is complete it will not, in any case, be expanded to cover situations for which it was not originally intended.

In order for the administrative practice to apply the following seven conditions must be met at all times for the corporation to be considered as a single purpose corporation:

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 United States 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 United States for the personal use or enjoyment of the shareholder.

5. The shareholder would be charged with all the operating expenses of the property by the corporation, with the result that the corporation would show 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.

It remains a question of fact, determined on a case by case basis, as to whether or not a particular corporation would meet all the above conditions. However, where all the above conditions have been met, it is our view that where as a consequence of the shareholder's death all the shares (and shareholder debt) of the corporation are acquired by the spouse of the deceased shareholder (where the spouse is resident in Canada) such transfer of ownership of the shares of the corporation would not, by itself, cause us to conclude that the corporation ceased to be a single purpose corporation. In our view the transfer of shares in this type of situation was originally intended to be covered by the administrative practice. Of course, for the corporation to continue to be treated as a single purpose corporation the conditions described above must continue to be met as long as the spouse owns the shares (e.g., the U.S. residential real property must continue to be for the personal use or enjoyment of the spouse/shareholder).

Where, however, the shares and debt of such a corporation are the subject of an inter vivos transfer in our view such a transfer would not be covered by our administrative practice.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch