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 18, 1983 HEAD OFFICE Corporate Rulings Directorate P.K. Tang 995-l787
RE: Personal Use of Corporations Property
This is in reply to your memo of July 18, 1983 concerning the above noted. Our replies to your questions in the order presented in the memo are as follows:
1) As stated in paragraph 3 of TOM 10(20)(22).7 where a shareholder is permitted to use the corporation's property for an amount less than the fair market rental the shareholder will be taxed on the difference as a benefit received. Under the circumstances, it is our position that the property can not be said to have been acquired for the purpose of gaining or producing income nor could the operating expenses in respect of the property be said to have been incurred for the purpose of gaining or producing income from a business or property. Therefore, for purposes of Capital Cost Allowance the property will not be classified as depreciable property (paragraph 1102(1)(c) of the Regulations) and no deduction on account of the operating expenses in respect of the property will be allowed to the corporation except to the extent of the rent paid by the shareholder (paragraph 18(l)(a) of the Act).
In the event that the shareholder does pay the fair market rental to the corporation for the use of the property, it would be difficult to argue that the property was not acquired for the purpose of gaining or producing income. Hence under such circumstances, we would generally allow the deduction of all the operating expenses in respect of the property to the corporation. The corporation would also be entitled to claim a loss as a result of the operation of the property. However, it should be noted that pursuant to the provisions of subsection 1100(11) of the Income Tax Regulations the amount of the C.C.A. deductions in respect of the class of the property which include rental property may not exceed the net rental income of the taxpayer from the property before claiming C.C.A.. This restriction however does not apply to a corporation whose principal business throughout the year was leasing, development or rental of real property by virtue of subsection 1100(12) of the Regulations.
2) As discussed above, where the shareholder has not paid a fair market rental for the use of the corporation's property, the allowable operating expenses will be limited to any rent received and no C.C.A. deduction is allowed. This is so even if the corporation is in the business of renting (other) properties.
3) Generally it is the practice of the Department to allow reimbursement by a shareholder of an amount taxable under subsection 15(1) of the Act when the issue of the assessment is involved with the problem of a valuation of property. However, in the case of a determination of fair market rental it is our view that this is not a question of valuation of property. Hence, once it has been determinated that the adjustment under TOM 10(24)(22) is applicable, the shareholder should not be allowed to reimburse any amount taxable under subsection 15(1).
Notwithstanding of our view above we recognize that differences of opinion do sometimes exist in respect of the fair market rentals as well as fair market values of a property. Hence, it might not be inappropriate to take a flexible approach on the reimbursement policy when the taxpayer has demonstrated that he has made an honest effort in establishing the amount for such purposes, for example, the rental arrived at was by following an accepted valuation procedure or was based on an independent appraisal, there is a lease with a rent adjustment clause similar to the price adjustment clause described in IT-169 or the rent has been adjusted annually to reflect the normal increases due to inflation, etc..
4) The Hot Line answer No. 9 under subsection 15(1) applies only to a situation where all four conditions described therein are present. It is not contrary to the policy stated in TOM 10(24)(22).7(2) since the four requirements in the answer will limit the application only to corporations which were established solely for the purpose of providing the shareholders with "CO-OP" housing as cheaply as possible. This type of corporation does not carry on any commercial activities but only acts in the nature of a bare trustee on behalf of the shareholders to pass on to them any savings from bulk buying, averaging costs, etc.. These corporations were not formed to make a profit.
The shareholders are in effect dealing among themselves in a co-operative exercise to minimize their costs rather than to earn an income. Apparently such organizations would not be comparable with the type of corporations envisaged in the TOM chapter.
We trust the above will be of assistance to you.
ORIGINAL SIGNED BY
D.B. MORPHY
Chief Services, Public Utilities & Exempt Corporations Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1983
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© Sa Majesté la Reine du Chef du Canada, 1983
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