14 November 2008 External T.I. 2008-0295871E5 - disposition of property

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: where shareholders transfer a property to their corporation but they personally continue to pay the related expenses, can the corporation transfer the property back to the shareholders on a tax-free basis so that the accrued gain on the property will be reported when the property is eventually sold by the shareholders?

Position: General comments

Reasons: see response

									2008-029587
XXXXXXXXXX 								C.  Ritchie
(613) 952-1506
November 14, 2008

Dear XXXXXXXXXX :

Your letter of March 26, 2008, that was received at the Calgary Tax Services Office on July 25, 2008, was forwarded to this office in October 2008. We apologize for the delay in responding.

Your letter describes a situation where you and your business partner acquired a rental property in 1999. Shortly thereafter, you transferred this rental property to a corporation in which you and your partner are shareholders. Every year the corporation paid a management fee to the shareholders equal to all the income from the property and the shareholders reported their share in their respective personal income tax returns. You indicate that you have paid all expenses related to this property personally since it was transferred to the corporation. You would now like to transfer ownership of this property from the corporation back to the individual shareholders and defer any capital gain until there is an actual sale of the property. In your view, you are the beneficial owner of this property and have been the beneficial owner since its purchase.

You have requested whether the transfer of the property from the corporation to the shareholders can be made on a tax-free basis so that the gain accrued on the property since its original acquisition will be reported only when the shareholders will dispose of the property in the future.

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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments. Whether or not in a particular case a corporation holds the title of a property as bare trustee for other persons who are the beneficial owners is a question of fact that can only be resolved by a review of the documents and circumstances of the case. However, there is generally a presumption that the holder of legal title is also the beneficial owner of the property.

As a general rule, the CRA cannot ignore legally valid documents entered into by parties to a transaction and the legal rights that they create in order to assess the tax consequences of such transactions. Auditors have no choice but to assess on the facts present at the time of assessment or audit. Where the documents do not reflect the true intentions of the parties, the parties may be able to apply for a rectification order as discussed in Income Tax Technical News ITTN-22, which can be viewed on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/itnews-22/itnews-22-e.html

There are a number of rules in the Income Tax Act (the Act) related to the transfer of property to a corporation by a shareholder and vice versa. These rules recognize that, generally, transactions between a corporation and its shareholders are considered to be non-arm's length transactions and stipulate that, unless expressly provided otherwise in the Act, transfers of property from a shareholder to a corporation or from a corporation to a shareholder must take place at fair market value.

Generally, where a transfer of property is made by a corporation to its shareholders for no consideration or for consideration less than the fair market value, then a benefit equal to the difference between the fair market value of the property at the time of transfer and the consideration received would be included in the income of the shareholders, pursuant to subsection 15(1) of the Act.

Useful comments relating to the income tax treatment of transactions between corporations and shareholders can be found in Interpretation Bulletins IT-432R2, Benefits Conferred on Shareholders, and IT 291R3, Transfer of Property to a Corporation under Subsection 85(1). These publications are available on the Canada Revenue Agency's website at www.cra.gc.ca.

We trust that the foregoing comments will be of assistance to you.

Yours truly,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch