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: Whether an imputed rental benefit conferred on a shareholder may be reduced by an interest-free loan by the shareholder to the corporation?
Position: Yes, in certain circumstances.
Reasons: Consistent with our position in paragraph 11 of IT432R2.
XXXXXXXXXX 2008-026740
Marc Edelson, LL.B.
June 5, 2008
Dear XXXXXXXXXX :
Re: Section 15(1) – Shareholder Benefits
This is in reply to your letter to us dated February 6, 2008 wherein you requested our views regarding the application of subsection 15(1) of the Income Tax Act (Canada) in the circumstances described below. Unless otherwise stated, all statutory references herein are to the Income Tax Act (Canada) and the regulations promulgated thereunder.
You have asked us to consider alternative situations where, in respect of a corporation whose single purpose is to hold property for its shareholder and that previously acquired such a property, the shareholder makes an interest-free loan to the corporation in respect of the property.
In the first situation, at some time after the acquisition of the property by the corporation the shareholder makes an interest-free loan to the corporation in an amount equal to the greater of the cost of the property to the corporation and the fair market value of the property at that time.
In the second situation, the corporation disposes of the particular property and then receives an interest-free loan from the shareholder to enable it to reacquire the property or a similar property.
Your request appears to relate to 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 70-6R5 (“IC-70-6R5”) dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.
In Document 2004-0086791C6 (June 23, 2004) we stated that the taxable benefit conferred on a shareholder in respect of property held by a single purpose corporation for that shareholder’s benefit should be calculated according to the instructions in paragraph 11 of Interpretation Bulletin IT-432R2.
Based on that paragraph of the Interpretation Bulletin and the comments in the document referred to, it is our view that an interest-free loan to a single-purpose corporation that can be specifically identified as a reimbursement of the cost to the corporation of a particular property may be deducted from the amount that is the greater of the cost and the fair market value of the particular property before a normal rate of return is applied to the remaining amount for the purpose of calculating the imputed rent associated with the property.
It is also our view that if the fair market value of the property is greater than its cost to the corporation and the corporation disposes of the property and, with the proceeds of an interest-free loan from the shareholder, reacquires the particular property or a similar property at an increased cost amount, the shareholder will be entitled to deduct the amount of the interest-free loan from the increased cost of the property to the corporation before a calculation is made of the imputed rent associated with the property.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5, and accordingly are not binding on the Canada Revenue Agency.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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