24 January 2003 External T.I. 2002-0164895 - SINGLE PURPOSE CORP.

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: Do shares of a single purpose corporation qualify as a "principal residence" for purposes of section 54 of the Act?

Position: No.

Reasons: 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.

2002-016489
XXXXXXXXXX Karen Power, CA
(613) 957-8953
January 24, 2003

Dear XXXXXXXXXX:

Re: Principal Residence Exemption - Single Purpose Corporations

This is in reply to your letters of September 10 and 24, 2002, requesting our comments regarding whether shares of a single purpose corporation may qualify as a "principal residence" for purposes of section 54 of the Income Tax Act (the "Act"). The Montréal Tax Services Office forwarded the September 10, 2002 letter to our Directorate for reply. We apologize for the delay in replying to your inquiry.

You provide a scenario in which a single purpose corporation owns a duplex. The single purpose corporation's articles of incorporation provide that each shareholder is entitled to occupy one of the residences in the duplex pursuant to a long-term lease at a nominal rent. The lease will terminate in the event that it is assigned to any person who is not a shareholder of the corporation. In addition, the by-laws of the corporation prohibit the directors from declaring dividends or otherwise conferring a benefit on its shareholders.

Our Comments

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. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA").

As discussed in document # E2002-0148785, 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. Paragraph 3 of IT-120R5 states that 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.

You have asked whether we would reconsider these comments in light of document # F2002-0133145, dated May 1, 2002 that in your view provides a more flexible meaning to the term "co-operative housing corporation" for purposes of the definition of "principal residence". However, the May, 2002 letter indicates that we have previously ruled that an indivisible unit composed of shares of a corporation and a lease entitling the owner to inhabit a housing unit owned by the corporation may be considered a "housing unit" for purposes of the definition of principal residence in section 54 of the Act. As requested, we have attached a severed copy of a ruling dealing with this issue.

An advance income tax ruling is a written statement given by the Income Tax Rulings Directorate (the "Directorate") to a taxpayer stating how the CCRA will interpret and apply specific provisions of existing Canadian income tax law to a definite transaction or transactions which the taxpayer is contemplating. An advance income tax ruling given by the Directorate applies only to the taxpayer(s) identified in the ruling. The rulings apply to the particular set of facts and proposed transactions described in the ruling letter and do not necessarily apply to other similar transactions. The above-noted ruling was given in a specific set of circumstances which is quite different from that of a single purpose corporation.

In the situation you describe, it is our view that shares of a single purpose corporation which owns a duplex would not qualify as a principal residence for purposes of claiming the principal residence exemption.

As indicated in our previous correspondence, the CCRA's administrative position regarding single purpose corporations was originally developed in response to U.S. estate tax legislation. Certain changes to the Canada-United States Income Tax Convention (the "Treaty") came into effect on November 9, 1995. 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 concerns that originally lead to our administrative practice. In this regard, we would also note that these concerns would generally not apply to a principal residence. While our administrative practice, remains in effect, it will not, in any case, be expanded to cover situations for which it was not originally intended.

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

cc. Teresa Masone

Montréal Tax Services Office

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