22 August 1989 Internal T.I. 58289 F - Shareholder Benefit

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 22, 1989

Dear Sirs:

Re:  Subsection 15(1) of the Income Tax Act (Canada) (the "Act")

This letter is in response to your own of June 23, 1989 wherein you requested our position with respect to the assessment of a shareholder benefit under the above-captioned provision of the Act in the fact situation outlined by you and reproduced below.

Fact Situation

1)     A Canadian resident individual would like to invest in a U.S. recreational property.

2)     The purpose of this investment is primarily for personal use and enjoyment. However, it is anticipated that the property may be rented at times to the individual's Canadian operating company (Opco). Opco would offer it to various independent dealers as a "perk" for exceptional sales performance.

3)     Any rent paid by Opco to the owner of the property would be treated as a reimbursement of the proportionate operating and carrying costs for the period rented. The amount paid would not exceed fair market value rent for similar accommodation.

4)     Opco would deduct any rent paid. Accordingly, the independent dealer in receipt of the benefit would include the amount of the benefit (i.e. equal to the rent amount paid by the operating company) in his income.

5)     Because of concerns in connection with U.S. estate tax, the Canadian individual would incorporate a new Canadian company (Newco) wholly owned by him, to acquire the recreational property. The purchase would be funded with amounts contributed by the individual shareholder to Newco as well as with bank mortgage financing obtained by Newco.

6)     Any rent received by Newco would be treated as reimbursements of expenses and would be credited against its operating and carrying costs. The excess carrying and operating costs not reimbursed by Opco would be contributed to Newco directly by the Individual shareholder.

7)     Newco would not claim any loss for tax purposes.

Our Comments

The situation which you set out is quite specific and it appears to relate to an actually contemplated transaction. Assurance as to the tax consequence of contemplated transaction can only be given in response to a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is described in Information Circular 70-6R, dated December 18, 1978  ("IC 70-6R"). We would, however, provide the following general comments.

The four conditions laid down by the Department in 1980 in setting out the position as to the circumstances in which we would not seek to assert that a benefit has been conferred on a shareholder are all necessary conditions. Accordingly, as only one of those conditions would be met, as is admitted by you, the Department would seek to assert that there is a benefit to the individual to which the provisions of subsection 15(1) of the Act would apply.

These views are expressed subject to the general limitations and conditions contained in IC 70-6R.

Yours truly,

for Director Reorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch