31 August 1989 Administrative Letter 58246 F - Shareholders Benefits and Roll-Overs to Corporations

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.

August 31, 1989

Dear Sirs:

Re:  Technical Interpretation on the Application of Subsection 15(1) of the Income Tax Act (Canada) (the "Act")

This letter is in response to your own of April 10, 1989 wherein you requested our views as to the application of the above-captioned provision of the Act to what you consider to be six variants of the general fact situation outlined by you in your letter and reproduced below.

Basic Fact Situation

You state that:

     "In each of the cases, the shareholder would have a Canadian holding company owning the real property in the United States. The shareholder will hold 100% of the shares of the company.  There would be no capital cost allowance taken on the property. All expenses of the property will be paid by the shareholder, personally.  The property will either be transferred to the corporation by the shareholder, or the shareholder will advance funds to the corporation to enable it to purchase the property. There will be no taxable income or loss generated by holding the real property in the corporation."

You then pose the following cases:

Situation I

The property is currently held by the corporation.

Situation II

The shareholder establishes a corporation solely to hold the real property situated in the United States.  The property would be transferred to the corporation by electing under the provisions of section 85 (presumably, subsection 8.5(1)) of the Act, such that there will be no gain or loss on the transfer.

Situation III

Same as II except the property would be transferred at fair market value.

Situation IV

The corporation will already be in existence, and carrying on a separate business.  The shareholder would transfer the property to the corporation by electing under the provisions of section 85 (presumably, subsection 85(1)) of the Act, again such that no gain or loss would result on the transfer.

Situation V

Same as IV except the property would be transferred at fair market value.

Situation VI

There may be situations where a taxpayer owns a vacation property in the United States through the corporation.  This property would be rented during any period while it is not being used by the taxpayer.

Our Comments

The Department's position as to the circumstances in which we will not seek to assert that a subsection 15(1) benefit has been conferred on a shareholder of a corporation holding U.S. residential property is set out in the answer to Question 40 of the 1980 Revenue Canada Round Table (1980 Canadian Tax Foundation Annual Conference).  We stated then that:

     "The general rule is that a taxable benefit will result where the fair market value rental of the property is greater than the outlays incurred by the shareholder.  However, a shareholder benefit will not normally be assessed where all of the following conditions are met:

     (i)  The corporation's only objective is the holding of property for the personal use or enjoyment of the shareholder.

     (ii)  The shares of the corporation are held by an individual or an individual and persons (other than a corporation) related to an individual.

     (iii)  The only transactions of the corporation relate to its objective of holding property for the personal use or enjoyment of the shareholder.

     (iv)  The shareholder would be charged with all of the operating expenses of the property by the corporation, with the result that the corporation would show no profit or loss with respect to the property on any of its returns."

The Department is not prepared to expand this practice beyond what was contemplated in the above pronouncement.

Situation I

In our view, the application of subsection 15(1) of the Act depends on the method by which the corporation acquired the property (see our comments in respect of situations II or III).

Situation II

The Department would assert that there is a benefit to which subsection 15(1) of the Act applies.  The exception detailed above does not provide for the use of subsection 85(1) of the Act.

Situation III

The Department would not seek to assert that subsection 15(1) would apply when the property is sold to the corporation on a taxable basis, and the four conditions listed in 1980 have been met.

Situation IV to VI

In each of these situations, all of which seem to be at odds with your basic fact situation, the first and third conditions laid down in our 1980 Round Table response would not be satisfied and, as such, the Department would seek to assert that there is a benefit to which the provisions of subsection 15(1) of the Act apply.

Amount of the Benefit

In our view, the amount of the benefit is the.fair market value rental of the property, calculated in accordance with the principles discussed in our answer to Question 14 of the 1985 Revenue Canada Round Table (1985 Canadian Tax Foundation Annual Conference).

These comments are made subject to the general limitations and qualifications set out in Information Circular IC 70-6R, dated December 18, 1978, and are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch