11 February 2011 External T.I. 2010-0360001E5 - Shareholder benefit - single purpose corporation

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: Does a subsection 15(1) shareholder benefit result from the personal use and enjoyment of an airplane held by a single purpose corporation?

Position: Question of fact

Reasons: We have ruled on this issue in the past. The circumstances described in the request are virtually identical to question 27 at the 2008 APFF conference.

XXXXXXXXXX 							Ryan Lay
								2010-036000
February 11, 2011

Dear Sir:

RE: XXXXXXXXXX

We are writing in response to your letter of November 12, 2009.

As stated in paragraph 22 of Information Circular 70-6R5, the Income Tax Rulings Directorate only provides written confirmation of the tax consequences arising from a specific proposed transaction by way of an advance income tax ruling. As the circumstances outlined in your letter appear to relate to a completed transaction, we are not in a position to issue an advance income tax ruling and your inquiry for a technical interpretation must be handled by CRA's tax services office responsible for the taxpayer for which the request is made for their views in this regard. However, we are prepared to provide you with the following comments, which are not binding on the CRA.

Our Comments

The "imputed rent" method of quantifying a shareholder benefit is described at paragraph 11 of Interpretation Bulletin IT-432R2 - Benefits Conferred on Shareholders as follows:

The calculation of the amount or value of the benefit is usually based on the fair market rent for the property minus any consideration paid to the corporation by the shareholder for the use of the property. The fair market rent may not, however, always be appropriate for measuring the benefit, particularly where it does not provide for a reasonable return on the value or cost of the property. This may be the case, for example, for a luxury residence or yacht made available for the shareholder's personal use. See Lloyd Youngman v. The Queen, 90 DTC 6322, (1990) 2 C.T.C. 10. If the fair market rent is not an appropriate measure, or if it does not exist or cannot be determined, the amount or value of the benefit would then usually be determined by multiplying a normal rate of return times the greater of the cost or fair market value of the property and adding the operating costs related to the property. The total of these two amounts is often referred to as the "imputed rent". Any consideration paid to the corporation by the shareholder for the use of the property is then subtracted from the imputed rent. In applying this formula, the amount representing the greater of the cost or fair market value of the property may first be reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder (in circumstances that are essentially the same as in the Youngman case) to enable the corporation to acquire the property, before multiplying by the normal rate of return.

At Question 27 of the Round Table on Federal Taxation at the 2008 Association de planification fiscale et financière (APFF) Conference, the CRA was asked to confirm:

(...) if it considers that there is no benefit conferred on a single shareholder of a corporation for the purposes of the application of subsection 15(1) of the ITA, when the only asset acquired by the corporation is used only for the personal use of the shareholder, and the latter personally finances the acquisition cost of this asset and assumes all other expenses related to its use?

The asset in question was a helicopter acquired for the personal use of the taxpayer through a corporation in order to limit his civil liability arising from the ownership of the aircraft.

In its response, the CRA stated:

When a single-purpose corporation owns a helicopter or another property which is used only for the personal purposes of the shareholder, the CRA will examine each situation on a case-by-case basis. It is possible, depending on the circumstances, that at a particular time, no benefit is conferred on a shareholder pursuant to the application of subsection 15(1) of the ITA, but such is not necessarily always the case.

CRA's response was consistent with the "imputed rent" method where the amount of the benefit determined under that method is nil because the shareholder personally finances the entire acquisition cost of a corporation's sole property and assumes all other expenses related to its use. Conversely, the following comments made in paragraph 11 of Interpretation Bulletin IT-432R2 - Benefits Conferred on Shareholders and echoed in document 2004-008679 about a luxury building in respect of which the "imputed rent" method would be appropriate could be made here. The CRA indicated in that document that "if a luxury building was made available to a shareholder of a single-purpose corporation and this shareholder had financed 100% of the cost of acquiring the corporation's building through an interest free loan to the corporation and paid all the costs of operating the building, the shareholder could nonetheless be subject to a taxable benefit pursuant to subsection 15(1) I.T.A. if the fair market value of the building exceeds its acquisition cost."

Your letter makes reference to the acquisition of an airplane by a sole purpose corporation. Should the "implied rent" method be the appropriate applicable method, the comments made in this letter would also be applicable to that corporation.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch