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 there is a benefit to a shareholder for use of property of a 149(1)(l) corporation at a cost below FMV.
Reasons: If a shareholder is able to use property of a 149(1)(l) corporation below FMV there may be a benefit to the shareholder under 15(1).
June 23, 2011
Dear XXXXXXXXXX :
Re: 149(1)(l) Corporation - Tax Implications to a Shareholder for Use of Land
We are writing further to our response to you of June 28, 2010 (our document 2010-035802), in which we commented on the tax implications to an entity described in paragraph 149(1)(l) of the Income Tax Act (the "Act") with respect to the sale of a piece of land. In this letter, unless otherwise expressly stated, all statutory references are to the provisions of the Act.
We understand that the objects of your corporation (the "Corporation") are to purchase, maintain and manage a property (the "Property") for use by its shareholders. The shareholders have built, and personally own, cottages on the Property. In our initial letter, we indicated that provided that the Corporation met the conditions in paragraph 149(1)(l) and subparagraph 149(5)(e)(ii), the gains realized from the sale of a particular piece of the Property would likely not be taxable to the Corporation. In addition, we indicated that the Corporation would be able to make payments to its shareholders without jeopardizing its status under paragraph 149(1)(l) as long as those payments were made from the gains realized from the sale.
Further to that letter, and in respect of subsequent telephone conversations with you (Merrigan/XXXXXXXXXX and Erskine/XXXXXXXXXX), we note that, as operated, the Corporation may be providing a subsection 15(1) benefit to its shareholders. This benefit arises because it does not appear that the Corporation, being operated as a 149(1)(l) entity, is receiving fair market value payments from the shareholders for the use of the Property.
Although the shareholders may have acquired a right to use the Property along with their shares (or as a share right), unless separate fair market value consideration was paid for the use of the Property, either at the time of purchase or subsequently, we are of the view that there may be a shareholder benefit if the shareholders are only paying a cost amount for the use of the Property. The shareholder benefit would be the difference between the current annual cost to the shareholders and the fair market value of the use of the Property. According to paragraph 11 of Interpretation Bulletin IT-432R2, "Benefits Conferred on Shareholders":
"If corporate property is made available for the personal use of a shareholder, a benefit under subsection 15(1) is generally considered to have been conferred on the shareholder. This is so whether or not the shareholder has contributed to the cost of the property or has paid any related operating expenses... 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."
We trust that these comments will be of assistance.
Non-Profit Organizations and Aboriginal Issues Section
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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