16 November 1982 Income Tax Severed Letter A-7316 - [Rent-Free Accommodation—Paragraphs 6(1)(a) and 15(1)(c) of the Income Tax Act (the Act)]

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.

C. Lamarche (613) 593-7295

November 16, 1982

Dear Sir:

Re: Rent-Free Accommodation Paragraphs 6(1)(a) and 15(1)(c) of the Income Tax Act (the Act)

This is further to your letter of October 20, 1982 in which you submit various questions in respect of the following situation:

1. A taxpayer resident in Canada is the sole shareholder of a Canadian controlled private corporation.

2. The taxpayer conducts his business from his house and does a considerable amount of entertaining in his house.

3. It is proposed that the taxpayer sell his house to his company and occupy it. A taxable benefit of an amount equal to the fair market value of prevailing rents for comparable accommodation will be included is his income for the taxation year in which it is received.

It is your opinion that the taxpayer's situation is not unlike that of a head office manager of a bank. His house is provided to him by the company - it is a very comfortable house enabling him to entertain clients and prospective clients.

You are asking us to express opinions as to whether:

a) A taxable benefit under subsection 15(1) or section 6 of the Act, in excess of the fair market value of rent imputed as a benefit, will result from this situation.

b) Capital cost allowance (C.C.A.) will be restricted pursuant to paragraph 1102(1) (c) of the Income Tax Regulations (the Regulations).

c) The costs of carrying the house will be deductible pursuant to paragraph 18(i) (a) of the Act.

In answering your questions we have presumed that they relate only to events subsequent to the transfer of the house to the company as it is a question of fact whether a taxable benefit would arise upon the transfer of the house to the corporation.

Our Comments

A. In general, the amount of the benefits to be included in the taxpayer's income for the use of a house owned by his employer is normally considered to be the excess of the fair market rent for equivalent accomodation over a reasonable allowance for business usage and rent paid to the corporation. This benefit will be taxed under paragraph 6(1)(a) of the Act if it is related to the business activity of the corporation and it can reasonably be viewed as additional remuneration for services rendered by an employee-shareholder. Otherwise, the benefit will be taxed under paragraph 15(1)(c) of the Act.

The distinction between an office or employment benefit and a shareholder benefit can only be established by considering all the facts in a particular situation.

Where the amount of the benefit is substantial, as in this case, and where the prinicipal shareholder is the only one receiving such a benefit we would tend to consider it a shareholder benefit.

B. Usually C.C.A. to the corporation will be be restricted pursuant to paragraph 1102(1)(c) of the Regulations where the benefit is received by the taxpayer as an employee. Where it is received as a shareholder, C.C.A. will be restricted pursuant to the paid paragraph of the Regulations unless the property is considered to be used primarily for business purposes. Generally, the property will be considered to be used primarily for business purposes if it is so used for more than 50% of the time.

Where the corporation rents the property to the shareholder-employee the restrictions contained in subsections 1100(11) to (14) of the Regulations could apply depending on the nature of the corporation's business.

C. Similarily the cost of carrying the house will generally be deductible pursuant to paragraph 18(1) (a) or 20(1) (c) of the Act where the benefit is received by the taxpayer as an employee. Where it is received as a shareholder, the carrying charges including interest will not be deductible unless the property is considered to be used primarily for business purposes.

We trust the above comments are useful to you.

Yours truly, A. THIBAULT

for Director Non-Corporate Rulings Division