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.
XXXXXXXXXX 933550
Attention: XXXXXXXXXX
March 25, 1994
Dear Sirs:
Re: Subsection 15(1) of the Income Tax Act (Canada) (the "Act")
This is in reply to your letter dated November 26, 1993 wherein you requested our comments with respect to the application of subsection 15(1) of the Act in the following situation.
Mr. A and Mrs. A are both residents of Canada for purposes of the Act and they own 75% and 25%, respectively, of a Canadian-controlled private corporation ("Canco"). Mr. A incorporates and contributes equity to a U.S. holding corporation ("U.S. Holdco") to purchase a yacht that is to be moored in Florida. The yacht purchase is fully financed by U.S. Holdco's equity and is U.S. Holdco's sole asset. The yacht is used by Mr. and Mrs. A and all corporate expenses are charged to and fully paid personally by Mr. A. U.S. Holdco is a U.S. company for non-tax legal reasons.
You have asked us to confirm your view that U.S. Holdco does not qualify as a "single purpose corporation" and, as such, subsection 15(1) of the Act may apply because U.S. Holdco is conferring a benefit upon Mr. A. In the event that Mr. A sells his shares of U.S. Holdco to Canco for fair market value consideration and continues to pay all of the expenses of U.S. Holdco personally, you have asked us to confirm that there would be no benefit conferred upon Mr. A under subsection 15(1) of the Act because Mr. A would not be a shareholder of U.S. Holdco. If the Department determines that the provisions of subsection 246(1) of the Act would apply subsequent to the sale by Mr. A of his shares of U.S. Holdco to Canco, would the Department accept the findings in the Youngman case (Youngman vs. The Queen, (FCA) 90 DTC 6322) thereby reducing the amount of any benefit under subsection 246(1) of the Act by an amount of interest that would normally be paid on any interest-free shareholder loan advanced to Canco for the acquisition of the shares of U.S. Holdco?
It appears that the interpretation you seek relates to proposed transactions to be undertaken by specific taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.
The Department's administrative position regarding "single purpose corporations", as expressed in its response to questions 20 and 14 at the 1980 and 1985 Revenue Canada Round Tables, respectively, and confirmed in its response to question 9 of the 1989 Revenue Canada Round Table, only applies to a Canadian corporation that holds U.S. real property on behalf of its shareholders.
The amount of the benefit conferred on a shareholder under subsection 15(1) of the Act for his or her use of a luxury property owned by a corporation can only be determined subsequent to a review of all of the facts in each particular situation. Generally, in the case of luxury property it may be very difficult to find a fair market rental value which could be used in the determination of the shareholder benefit and, as stated in our response to question 33 at the 1987 Revenue Canada Round Table, the benefit may have to be determined using a normal rate of return on the greater of the cost or fair market value of the property, plus the related operating costs, less any consideration paid to the corporation by the shareholder.
If a shareholder has provided interest free loans to the corporation in order to finance the acquisition of the property, the Department would reduce the amount of the benefit by an amount equal to the interest that would normally have been paid by the corporation on the balance of any interest free shareholder loans related to the property only in a situation where the facts are similar to the Youngman case reported at 90 DTC 6322. As stated in question 8 at the 1990 Canadian Tax Foundation Revenue Canada Round Table, the Department is not prepared at this time to extend a benefit offset beyond the facts of the Youngman case. The recent decision of Mr. Justice Teskey in Arthur S. Donovan v. Her Majesty the Queen (T.C.C.) (as yet unreported) would support our view that the Youngman decision is restricted to similar fact situations. In addition, the Donovan decision would appear to support the position that to the extent any imputed interest has reduced the amount of a benefit under subsection 15(1), it would be included in the shareholder's income under paragraph 12(1)(c) of the Act. In any case, the amount loaned to a corporation to acquire shares of another corporation which has already acquired the luxury property would not constitute a loan used to acquire the luxury property and the situation would not be considered as identical to the situation found in the Youngman case.
It is our general position that the term "shareholder" as used in subsection 15(1) of the Act would not include a person who indirectly controls a corporation through a holding corporation. Although the provisions of subsection 15(1) of the Act would not normally apply in respect of the value of any benefit conferred by a corporation on an indirect shareholder, the provisions of subsection 246(1) of the Act could apply to include the amount of the benefit in the hands of the indirect shareholder. In addition, if the transfer of the shares of U.S. Holdco is carried out solely to avoid the possible application of subsection 15(1), consideration would have to be given to whether the general anti-avoidance rule found in subsection 245(2) of the Act might apply.
We trust that the above comments will be of assistance to you.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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