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 CCRA.

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

Principal Issues: Whether the sale of a residential property, at a discount, by a construction company, to a shareholder, an employee or a relative of either, would result in a taxable benefit.

Position: Yes.

Reasons:	For shareholders, subsection 15(1) of the Act would apply.
		For employees, paragraph 6(1)(a) of the Act would apply.
		For relatives of either, subsection 246(1) of the Act would apply.
		Where the discount is offered to a shareholder or an employee, and they transfer the offer to a relative, subsection 56(2) of the Act would apply to include the benefit in the income of the shareholder or employee, as the case may be.

								November 21, 2001

	Pat Bird						HEADQUARTERS
	Technical Advisor Team				A. Seidel, CMA
	Calgary Tax Services Office			(613) 957-2058

2001-009829

Taxable Benefits

This is in reply to your memorandum, dated July 10, 2001, requesting our views as to whether a taxable benefit is conferred on certain taxpayers in the situation where a construction company is selling homes to shareholders or employees on a "cost recovery" basis.

Background

1. A construction company is in the business of building residential homes.

2. It has a company wide policy that a shareholder or an employee of the company can purchase a home from the company at an amount that represents a recovery of all of the direct costs of the company plus a reasonable amount to cover overhead expenses of the company.

3. The amount that the shareholder/employee will pay for the home will always be less than the fair market value of the home.

Issue

Does the shareholder's/employee's acquisition of a home at less than fair market value result in the construction company conferring a benefit on the shareholder/employee?

Analysis

Pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act"), a taxpayer must include the value of benefits of any kind whatever received or enjoyed in the year in respect of, in the course of, or by virtue of, an office or employment. For greater certainty, subsection 6(23) of the Act provides that the value of assistance provided by any person in respect of, in the course of, or because of, an individual's office or employment in respect of, amongst other things, the cost of a residence, is a benefit received by the individual because of the office or employment.

Pursuant to subsection 15(1) of the Act, a shareholder, in computing income for the year, must include the amount or value of any benefits conferred upon the shareholder by a corporation. In the situation where a corporation provides a shareholder with assistance in respect of the cost of a residence, such assistance would be considered to be a benefit conferred upon the shareholder and therefore included in computing the income of the shareholder in the year the assistance is received.

Pursuant to subsection 246(1) of the Act, at any time where a person confers a benefit, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit is included in the income of the taxpayer, to the extent it is not otherwise already included in the taxpayer's income or taxable income earned in Canada, and provided that the amount of the benefit would be included in the taxpayer's income if the amount of the benefit were a payment made directly by the person to the taxpayer.

Subsection 56(2) of the Act includes, in computing a taxpayer's income, any payment or transfer of property made pursuant to the direction of, or with the concurrence of, the taxpayer, to some other person, for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person, to the extent that it would be included in computing the income of the taxpayer if the payment or transfer had been made directly to the taxpayer.

Paragraph 69(1)(b) of the Act deems a taxpayer who has disposed of anything to a person with whom they were not dealing at arm's length, for proceeds that are less than the fair market value thereof, to have received proceeds of disposition therefore equal to the fair market value of the thing at the time of disposition.

Our Comments

XXXXXXXXXX

The Income Tax Rulings Directorate's views with respect to the above issue are as stated in our letter, identified as file 9318945, wherein we state the following:

"The comments in paragraph 27 of Interpretation Bulletin IT-470R reflect an administrative practice of long standing wherein an employer in a merchandising business may sell its merchandise to employees at a discount. In these instances, the benefits that an employee derives from exercising this privilege are not normally regarded as taxable benefits. ... Furthermore, it was never intended that the position extend to major capital assets such as a residential property. Consequently, it is our view that where an employer in the construction industry sells a house or other building or a unit in a building from its inventory to an employee at a discount, a taxable benefit will result to that employee."

If a corporation were to allow an employee, regardless of whether or not he or she deals at arm's length with the corporation, to acquire a residential property at a discount, paragraph 6(1)(a) of the Act would include the value of the discount in the income of the employee. Paragraph 6(1)(a) of the Act applies to the value of "benefits of any kind whatever received or enjoyed" by the employee to the extent that the benefit is "in respect of, in the course of, or by virtue of an office or employment".

In the same way, it is our view that the sale of a residential property, at a discount, to a shareholder of a corporation, would result in a taxable benefit to a shareholder and be included in computing the income of the shareholder pursuant to subsection 15(1) of the Act.

Where the corporation offers a residential property to a shareholder or an employee at a discount and the shareholder/employee allows a relative to acquire the residential property, subsection 56(2) of the Act would apply to include the value of the discount in computing the income of the shareholder or employee, as the case may be.

By virtue of the relationship between the purchaser of the residential property and the shareholder/employee, the relative, as a question of fact, would not be considered to be dealing at arm's length with the corporation. Therefore, in the situation where a corporation makes a direct offer to a relative of a shareholder or an employee to acquire a residential property at a discount, it is our view that subsection 246(1) of the Act would apply to include the value of the benefit in computing the income of the purchaser.

Finally, in respect of all of the above situations, the corporation would be required to include in income the fair market value of the residential property disposed of by virtue of the deeming provision in paragraph 69(1)(b) of the Act.

While we hope our comments are of assistance, they are, nevertheless, general comments. If you have a specific situation that you are dealing with and would like our comments thereon, please provide all of the details of the arrangement entered into by the corporation and the purchaser, and we will provide our comments in respect of the particular fact situation. If you wish to discuss any of the above further, do not hesitate to contact us at the above number.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch