16 April 1997 External T.I. 9635995 - SH-BENFITS-LEASEHOLD IMPROVMENTS

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.

                                                963599
XXXXXXXXXX                                B.Kerr

Attention: XXXXXXXXXX

April 16, 1997

Dear Sirs:

Re: Subsection 15(1)

This is in response to your letter of October 16, 1996, concerning farmland owned by the parents but leased to and used by a family farm corporation.

You have requested our views on the application of subsection 15(1) of the Income Tax Act (the "Act"), if the corporation constructs buildings on the farmland or if the farmland including the principal residence is transferred to the corporation. With respect to the transfer of the farmland, you have asked if the individuals can retain their principal residence and 1/2 hectare if there is no means of specifically identifying a discrete legal title.

Our Comments

The situation described in your letter appears to involve actual proposed transactions with identifiable taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.

The Department's views concerning benefits conferred on shareholders are outlined in Interpretation Bulletin IT-432R2 and, in particular, paragraphs 10 and 11 provide comments in respect of additions or improvements to shareholders property and the personal use of corporate property by a shareholder.

As stated in paragraph 10 of IT-432R2, a corporation that is renting a building owned by a shareholder may make an addition or improvement to the building. If such an addition or improvement vests in the owner of the building, a benefit is considered to have been conferred on the shareholder by the corporation pursuant to subsection 15(1). The amount of the benefit is considered to be the present value of the amount, if any, by which the addition or improvement increases the value of the building to the shareholder at the time the building reverts to the shareholder. Therefore, in determining the amount of the benefit it is necessary to consider the particular facts of each case. The facts to be considered include the nature of the addition or improvement, the term of the lease, provisions for extension of the lease, provisions of the lease regarding leasehold improvements, and the amount of rent being charged. The benefit considered to be conferred in a particular taxation year is based upon the portion of the addition or improvement completed during that year. If the terms of the lease are later altered in favour of the shareholder, or if the lease is annulled before its term expires, a benefit would be created at that time equal to the increase in the shareholder's reversionary interest created by the alteration or cancellation of the lease.

As stated in paragraph 11 of IT-432R2, if corporate property is made available for the personal use of a shareholder, a benefit under subsection 15(1) is generally considered to have been conferred on the shareholder. This is so whether or not the shareholder has contributed to the cost of the property or has paid any related operating expenses. Also, the fact that the corporation has not claimed any capital cost allowance on the property is not relevant. The calculation of the amount or value of the benefit is usually based on the fair market rent for the property minus any consideration paid to the corporation by the shareholder for the use of the property. The fair market rent may not, however, always be appropriate for measuring the benefit, particularly where it does not provide for a reasonable return on the value or cost of the property. This may be the case, for example, for a luxury residence or yacht made available for the shareholder's personal use. See Lloyd Youngman v. The Queen, (90 DTC 6322). If the fair market rent is not an appropriate measure, or if it does not exist or cannot be determined, the amount or value of the benefit would then usually be determined by multiplying a normal rate of return times the greater of the cost or fair market value of the property and adding the operating costs related to the property. The total of these two amounts is often referred to as the "imputed rent". Any consideration paid to the corporation by the shareholder for the use of the property is then subtracted from the imputed rent. In applying this formula, the amount representing the greater of the cost or fair market value of the property may first be reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder (in circumstances that are essentially the same as in the Youngman case) to enable the corporation to acquire the property, before multiplying by the normal rate of return.

Where a discrete legal title cannot be identified, we are not aware of anything in the Act that would override this to allow for it. For comments concerning a principal residence situated on land used in a farming business, refer to paragraphs 26 to 30 of Interpretation Bulletin IT-120R4.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch