8 March 1994 Internal T.I. 9330927 - SHAREHOLDER BENEFIT

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		March 8, 1994

	Saskatoon District Office	Head Office
	Business Audit	Rulings Directorate
C. Chouinard
	Attention:  Barry McKenzie	957-8953
		7-933092

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- Shareholder Benefit

This is in response to your memorandum of October 21, 1993 wherein you asked our opinion as to whether or not a shareholder benefit was conferred on XXXXXXXXXX by the above-mentioned corporation.

Facts

Our understanding of the facts is as follows:

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District Office Position

You are of the opinion that the quonsets and improvements are such that they cannot easily, nor economically, be moved and, accordingly, that they cannot be considered to be temporary improvements. On that basis, and in the absence of formal leases and documentation relative to the use of the land and buildings, you are of the view that these expenditures represent shareholder appropriations by XXXXXXXXXX

Taxpayer's Position

The taxpayer's position is that XXXXXXXXXX has a legal interest in the quonsets built on the land and the improvements made thereto under The Improvements Under Mistake of Title Act of Saskatchewan. In the alternative, the taxpayer also maintains that the improvements are of a temporary nature.

Our comments

As outlined in paragraph 11 of Interpretation Bulletin IT-432R, generally speaking, any transfer of property by a corporation to or on behalf of a shareholder for inadequate or no consideration may give rise to an appropriation of property within the meaning of paragraph 15(1)(b) of the Income Tax Act, unless the provisions of paragraphs (a) to (d) apply. Furthermore, as set out in paragraph 17 of the said Interpretation Bulletin, where an improvement or addition is made by a corporation to a building leased from a shareholder, a benefit is considered to have been conferred on the shareholder if such an improvement or addition vests in the owner of the building. The amount of the benefit is considered to be equal to the present value of the amount, if any, by which the improvement or addition increases the value of the building at the time the building reverts to the shareholder.

In the present case, it is our opinion that the improvements made by XXXXXXXXXX to the shareholder's land result in a benefit being conferred on the shareholder. As the Federal Court of Appeal stated in Rudnikoff v. R., 75 D.T.C. 5008, "the general rule, both in the common law provinces and in the Province of Quebec is that a substantial building becomes a part of the land and belongs to the owner of the land". Since improvements vest in the owner of the land, a benefit has been conferred on XXXXXXXXXX as owner of the land and as shareholder of the corporation that made the improvements.

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In response to the representations made by the taxpayer's representative in his letter of October 4, 1993, we offer the following comments:

1.It is unfortunate that XXXXXXXXXX has not distinguished between his own property and that of his company. However, an argument can be made that those who have chosen the benefits of incorporation must bear the corresponding burdens.

Furthermore, the wording of subsection 15(1) is such that it is immaterial whether the company intended to confer a benefit on its shareholder or not. In the Soyko v. M.N.R., 71 D.T.C. 129 (T.A.B.) case, the taxpayer was the controlling shareholder of a corporation that operated a hotel. He was also the owner of an adjoining property (land and building) which he rented to his hotel corporation. The corporation made extensive improvements to the building on the taxpayer's property. The Minister added the cost of the improvements to the taxpayer's income as a benefit conferred by the corporation on him as a shareholder. On appeal, the taxpayer argued that an exception should be made in his case as he had failed to make a distinction between the hotel business held by the corporation and the property he personally owned. In the event, the Tax Review Board dismissed the taxpayer's argument and held that it had to consider the facts as they were and that there was no law or jurisprudence whereby the taxpayer could avoid being assessed.

2.In the R. v. Ginter, 77 D.T.C. 5274 case, the Federal Court, Trial Division, came to the conclusion that a benefit had not been conferred on the shareholder as the addition in question was temporary in nature and was to be demolished in the near future as part of the corporation's relocation plans. Accordingly, if the improvements are not capable of being moved or are capable of being moved but there would be no conceivable economic advantage to the corporation in removing them, it is our view that a benefit is conferred on the shareholder. In such circumstances, the improvements can be considered permanent in nature and an integral part of the land. On the other hand, if the improvements are temporary and it is contemplated that they will be removed at some later date, we should probably follow the Ginter case. Thus, no benefit should be assessed in such circumstances.

It is a question of fact whether any of the subject improvements are movable. The pavement, for example, could be removed by XXXXXXXXXX at some point in the future, but there would not likely be any economic advantage to the corporation in doing so as the pavement would be destroyed in the process. As far as the quonset and radiant heating are concerned, we are not able to determine based on the information provided whether they can realistically be removed and re-used.

3.We do not find the taxpayer's contention that XXXXXXXXXX has acquired a legal interest in the quonsets and other improvements pursuant to The Improvements under Mistake of Title Act persuasive. As we understand the taxpayer's reasoning, it is that XXXXXXXXXX made lasting improvements on the land under the belief that the land was its own. Proving an honest belief in a situation of facts, that does not exist, requires the identification of the thinking mechanism that did the believing. Although XXXXXXXXXX is a legal entity, the thinking mechanism of the corporation must be associated with an individual who can be identified as the mental element of corporate activity. In this case, the corporate thinking mechanism exists in the person of XXXXXXXXXX Accordingly, the question becomes whether XXXXXXXXXX was under the belief that the land was owned by the company. It is very unlikely that he held this belief. Moreover, in Tonks v. Township of York and Reid (1966), 59 D.L.R. (2d) 310 (SCC), the Court held that the provisions of a similar Act did not apply as the plaintiff knew the weaknesses of his title, and therefore could have no honest belief that he was making improvements on land that was his own. Consequently, in our opinion, this argument fails as it cannot be said that the corporation honestly believed the land to be its own.

4.Whether the improvements are made to buildings or to land owned by the taxpayer is inconsequential. It is the fact that a building or land owned by the shareholder is improved or increases in value that leads to a shareholder benefit. Accordingly, cases dealing with shareholder benefits arising out of improvements or additions to buildings owned by a shareholder are relevant.

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We trust that you will find our comments helpful.

A.M. Brake
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch