23 February 1993 External T.I. 9225405 F - Single Purpose Corporation - Artwork

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Single Purpose Corporations

We apologize for the delay in replying to your letter of August 24, 1992 wherein you have requested a technical interpretation with regard to the administrative practice of Revenue Canada, Taxation (the "Department") concerning "single purpose corporations" in two fact patterns which you have described as follows:

Fact Pattern A

-     Mr. A owns artwork which he purchased for $100.

-     The artwork has appreciated in value so that its current fair market value is $1,000,000.

-     The artwork is located in his home in Canada.

-     Mr. A intends to transfer the artwork to a holding company pursuant to subsection 85(1) of the Income Tax Act (Canada) (herein the "Act").

-     The artwork will remain in his home.

Fact Pattern B

-     Company A owns a condominium in the United States (the "U.S.").

-     Company A purchased artwork for $100.

-     The artwork has appreciated in value so that its current fair market value is $1,000,000.

-     The artwork is located in the condominium.

-     Except for the artwork, Company A qualifies as a single purpose corporation pursuant to the guidelines set out by the Department.

-     Company A is owned by Mr. A who uses the condominium as a vacation home.

You have asked the following questions with regard to these fact patterns:

1.     With respect to Fact Pattern A, would the Department apply the provisions of subsection 15(1) of the Act so as to deem Mr. A to have received a benefit and, if so, how would such a benefit be calculated?

2.     Would the Department apply any other provision of the Act which would result in negative tax consequences to Mr. A?

3.     With respect to Fact Pattern B, assuming that a benefit would be deemed to be received by Mr. A in Fact Pattern A, given that the artwork is part of the other furniture contained in the U.S. residence, would the Department agree to apply the rules with respect to single purpose corporations to the transaction so that no benefit would be taxed in the hands of Mr. A under Fact Pattern B?

4.     Would the answer of the Department to Fact Pattern A be different if the artwork were located in the U.S. and the roll-over of the artwork to a Canadian corporation were done solely to avoid U.S. estate taxes?

Our Comments:

In our view, in any situation where a property owned by a corporation is made available to a shareholder thereof the potential exists for a benefit having been conferred on that shareholder for the purposes of subsection 15(1) of the Act. The determination as to whether such a benefit has arisen in a particular situation, as well as the quantum thereof, involve questions of fact which can only be resolved after a review of all of the relevant facts of that particular situation.

In general terms, however, the position of the Department concerning such situations remains basically as stated in response to question number 33 of the Revenue Canada Round Table at the annual conference of the Canadian Tax Foundation (the "Conference") held in 1987. In other words, the amount or value of the benefit conferred where corporate owned property is made available to a shareholder would generally be considered to be equal to the fair market rental of that property less any consideration paid by that shareholder with regard to the property. As noted in that response, however, where this approach is not appropriate for measuring the value of the benefit, e.g., if it does not provide a reasonable return on the cost or value of the property, the benefit would generally be determined with reference to a normal rate of return on the greater of the cost or fair market value of the property, plus the related operating costs but reduced, as above, by any consideration paid by that shareholder with regard to the property. In our opinion, the findings of the Federal Court of Appeal in Youngman v. The Queen, 90 DTC 6322, support this approach, however, as indicated in our response to question number 8 of the Revenue Canada Round Table at the 1990 Conference, the Department has accepted that the benefit may be reduced by an amount equal to interest that would normally be paid by the corporation on the balance of any interest-free shareholder loan related to the property.

The administrative practice of the Department concerning "sole purpose corporations", to which you have referred in your letter, was first detailed in response to question number 20 of the Revenue Canada Round Table at the 1980 Conference. This response was given in the specific context of residential real property located in the U.S. which is held by a Canadian corporation for the occupancy of its shareholder and indicated that a benefit otherwise arising (where the fair market rental of the property exceeded the consideration paid by the shareholder) would not normally be assessed provided all the conditions given therein were satisfied. The restricted scope of this administrative practice has been highlighted in responses to questions from Revenue Canada Round Tables at various Conferences (i.e., 1985 - Q.14; 1988 - Q.2; 1989 - Q.9). At the present time there is no intention to expand or alter this administrative concession to include any other type of property.

Therefore, in our opinion, Fact Pattern A detailed above is not a situation to which this administrative practice applies, while Fact Pattern B is a situation to which such practice would cease to apply upon the acquisition of the artwork, since both situations would involve property other than residential real property located in the U.S. which is held by a Canadian corporation for the occupancy of its shareholder (the former situation deals solely with corporate property situated in Canada, while the latter situation deals with artwork). Consequently, it is also our view that a benefit may have been conferred on Mr. A in either of those situations for the purposes of subsection 15(1) of the Act, with such determination, as well as the determination of the quantum of any such benefit, to be made as discussed above. Whether or not any other provision of the Act would be relevant in such situations is a question which could only be determined after a review of all of the relevant facts of a particular situation.

With regard to your last question, we would also note that, as detailed in our response to question number 9 from the Revenue Canada Round Table at the 1989 Conference, the residential real property in question must be acquired by the corporation on a fully taxable basis, i.e., a "rollover" provision of the Act is not to be utilized even for otherwise "qualifying" real property, in order for this administrative practice to be available.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2. As such, these comments do not constitute an advance income tax ruling and consequently are not binding on the Department.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch