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: Various questions regarding the principal residence exemption and single purpose corporations.
Position: General comments provided.
Reasons: General comments provided.
2002-014878
XXXXXXXXXX Karen Power, CA
(613) 957-8953
August 29, 2002
Dear XXXXXXXXXX:
Re: Principal Residence Exemption
This is in reply to your letter of May 1, 2002, (forwarded to our directorate on June 25, 2002) requesting our comments on the application of the principal residence exemption.
Many of your enquiries relate to a situation in which a residence is held in a single purpose corporation. The residence is the corporation's only asset, is located in the United States, and is held for the personal use and enjoyment of the sole shareholder. The residence would qualify as the shareholder's principal residence were it not owned by the single purpose corporation. You also enquire whether a residence held in an alter ego trust can qualify for the principal residence exemption. It is our understanding that both the shareholder and the trust referred to in your letter are residents of Canada.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA").
Where a principal residence has been transferred to an alter ego trust (as defined in subsection 248(1) of the Income Tax Act (the "Act")), the trust may be entitled to claim the principal residence exemption upon the actual or deemed disposition of the residence. Where such a transfer takes place, the settlor no longer owns the property, and he/she wound not be entitled to claim the principal residence exemption on disposition of the residence by the trust. Paragraph 4 of Interpretation Bulletin IT-120R5 Principal Residence describes the ownership requirement relating to the principal residence exemption.
The definition of "principal residence" in section 54 of the Act provides in paragraphs (a.1) and (c.1) that a personal trust may generally claim a property as a principal residence for a taxation year where, in the calendar year ending in that year, an individual (referred to as a "specified beneficiary") "beneficially interested" in the trust (as that term is defined under subsection 248(25) of the Act) ordinarily inhabits the property or whose spouse, common-law partner or former spouse or common-law partner or child ordinarily inhabits it. Paragraphs 35 and 36 of IT-120R5 provide additional information on the requirements for claiming the principal residence exemption by a personal trust. You may also refer to form T1079 Designation of a Property as a Principal Residence by a Personal Trust for additional information.
An inter vivos personal trust is a trust under which no beneficial interest was acquired for consideration payable directly or indirectly to the trust or to any person who made a contribution to the trust by way of transfer, assignment or any other disposition of property. For this purpose, the settlor of a trust who also has an interest in that trust is not considered to have acquired an interest in the trust for consideration solely because of his or her transfer of property to the trust. As a result, an alter ego trust, like a spousal trust, would generally be a personal trust and may be entitled to claim the principal residence exemption.
If a property qualifies as a principal residence, an exemption can be claimed under paragraph 40(2)(b) of the Act to reduce or eliminate any capital gain otherwise occurring on the disposition of the property. The paragraph 40(2)(b) exemption is only available to individuals. An individual is defined in subsection 248(1) of the Act to mean a person other than a corporation. Consequently, where a principal residence is held in a single purpose corporation, the corporation would not be entitled to claim the principal residence exemption on the disposition of the residence.
You also enquire whether the principal residence exemption would apply to an individual on the disposition of shares of a single purpose corporation as described above. The definition of "principal residence' in section 54 of the Act refers to property that is a housing unit, a leasehold interest in a housing unit or a share of the capital stock of a co-operative housing corporation acquired for the sole purpose of acquiring the right to inhabit a housing unit owned by the corporation. As discussed in paragraph 3 of IT-120R5, the term "co-operative housing corporation" means an association, incorporated subject to the terms and conditions of the legislation governing such incorporation, and formed and operated for the purpose of providing its members with the right to inhabit, by reason of ownership of shares therein, a housing unit owned by the corporation. In our view, the shares of a single purpose corporation would not be considered shares of a co-operative housing corporation and consequently would not qualify as a principal residence for purposes of claiming the principal residence exemption.
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 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. Whether the administrative practice would be expanded to cover a situation in which the shares of a single purpose corporation are transferred inter vivos to an alter ego trust can only be determined after taking into consideration all of the relevant facts and in the context of an advance income tax ruling. As you are aware our above administrative position is under study, but remains in effect until the study is complete.
Where a single purpose corporation disposes of its residential real property, the corporation would no longer meet the conditions of our administrative practice, however a deemed taxable benefit pursuant to subsection 15(1) of the Act would not apply in respect of the property since the shareholder would no longer be using the property owned by the corporation for personal purposes. Any gain on the disposition of the real property would be taxable to the corporation. Where the corporation is a resident of Canada for purposes of the Canada-U.S. Income Tax Convention (the "Treaty"), Canada's right to tax any gain realized on the disposition of the real property will be maintained. However, pursuant to Article 13 of the Treaty, the U.S. will also be entitled to tax any gain arising on the disposition of the real property. In such an event, Canada will provide you with a foreign tax credit to offset any tax that you might have to pay to the U.S. upon your disposition of the property.
We trust that our comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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