31 August 1990 Ministerial Letter 900508 F - Shareholder Benefit of "Sole Purpose Corporations" Holding U.S. Residential Real Estate

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, 1990

Dear Sirs:

This is in reply to your letter dated March 30, 1990 concerning  the Department's administrative position concerning the application of subsection 15(1) of the Income Tax Act as it relates to so-called "sole purpose corporations" holding U.S. residential real estate.

General Comment

The Department's administrative position in this regard continues to be as previously stated by the Department in response to Question 20 at the Revenue Canada Round Table at the 1980 Canadian Tax Foundation Annual Conference as elaborated upon in response to questions at subsequent Round Tables at the 1985, 1988 and 1989 Annual Conferences.  However, the Department is not prepared to extend or expand the application of this administrative concession and its application will be strictly limited in accordance with the conditions and limitations previously expressed by the Department.

Hypothetical Fact Situations

The following is our response to the three hypothetical fact situations submitted by you for our comment.

1.     The common shares of the sole purpose corporation are owned by a family trust of which the father, mother and children are the beneficiaries and the father, mother and a unrelated person are the trustees.  The money to purchase the U.S. vacation property was loaned to the corporation by the parents.

The Department's administrative concession would not apply as all of the conditions therefore have not been met.  In particular condition No 2, that the shares of the corporation are held by an individual or an individual and persons (other than a corporation) related to the individual, is not met.  A trust is not a person for purposes of this administrative concession.  Furthermore, the funding of the corporation in the manner proposed may not be acceptable.

2.     The common shares of the sole purpose corporation are owned by the children of Mr. and Mrs B.  The funds to purchase the U.S. real estate are loaned to the corporation by Mr. and Mrs. B.

As indicated at the 1985 and 1988 Canadian Tax Foundation Annual Conferences, the Department's administrative concession may not apply where funds are advanced to the corporation for the purchase of the property by someone who does not deal at arm's length with the shareholder.

3.     The same situation as 2. except the corporation is controlled by the parents, Mr. and Mrs. B, through voting preferred shares.

You will observe that the pronouncements of the Department in respect of this administrative concession have always referred to "the shareholder".  "The shareholder" referred to is the shareholder who would be subject to taxation under subsection 15(1) in the particular circumstances but for the Department's administrative concession.

Once again, in situation 3. some or all of the shareholders may not meet all of the requirements necessary to be permitted the benefit of the Department's administrative concession as to the application of section 15(1).  In particular, in respect of each of the shareholders, funds have been advanced to the corporation for the purchase of the property by someone else who does not deal at arm's length with the shareholder.  In addition we note that depending upon the particular facts the issue of the preferred shares may contravene the condition (number 3) that the only transactions of the corporation relate to its objective of holding property for the personal use or enjoyment of the shareholder.  We also note that we anticipate that condition number 4, that "the shareholder" would be charged with all the operating expenses of the property of the corporation...", will likely be contravened in respect of some, if not all, the shareholders.

Yours truly,

for DirectorReorganization and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch