21 September 1992 Income Tax Severed Letter 9134125 - Vacation Property Used Rent-free by Non-Resident

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.

913412
K.B. Harding
957-2111
24(1)

Attention: 19(1)
Setpember 21, 1992

Dear Sirs:

Re: Paragraph 214(3)(a) and Subsection 212(2) of the Income Tax Act ( the "Act")

This is in reply to your letter of December 5, 1991 wherein you requested our opinion whether withholding tax under Part XIII of the Act would be required in the following hypothetical situation.

A corporation (the "Corporation") that is not resident in Canada for purposes of the Act owns a vacation property situated in Canada. All of the shareholders of the Corporation are non-residents of Canada for purposes of the Act. The Corporation permits its shareholders to use the vacation property on a rent-free basis.

We are in agreement with your comments that if such shareholders were resident in Canada, they would be required to include an amount in income under subsection 15(1) of the Act in respect of rent-free use of the vacation property.

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Paragraph 214(3)(a) of the Act provides that where section 15 would, if Part I were applicable, require an amount to be included in computing a taxpayer's income, that amount is deemed to have been paid, for purposes of Part XIII of the Act, to the taxpayer as a dividend from a corporation resident in Canada. Subsection 212(2) of the Act would subject such dividend to 25% withholding tax when paid to a non-resident of Canada unless a reduced rate of tax was provided by an appropriate tax treaty.

In your view, since there is little nexus between Canada and the non-resident shareholders of the Corporation, you question whether Canada should have the right to tax the value of the benefits conferred on such shareholders. Your letter indicated that Canada would have the right to tax any rent paid by the non-resident shareholders to the Corporation by virtue of paragraphs 212(13)(a) and 212(1)(d) of the Act for use of the vacation property located in Canada. In that situation you stated that Canada would be taxing income from the use of Canadian situs property which has a clear connection to Canada. Since there is no clear connection with Canadian property in the subsection 15(1) situation, you are of the view that the logic of Canada imposing any kind of tax appears far more tenuous.

In our view, it is arguable that, as a result of the non- resident shareholders using Canadian situs property there is sufficient nexus with Canada for paragraph 214(3)(a) and subsection 212(2) of the Act to be applicable.

We trust the above comments are adequate for your purposes.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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