18 October 1989 Income Tax Severed Letter RCT 5-8727

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.

We are writing in reply to your letter of September 21, 1989, wherein you requested clarification of our administrative position regarding the application of subsection 15(1) of the Income Tax Act as it relates to a "Single Purpose Corporation" in the following situation.

• 1. A Canadian resident taxpayer's wholly owned corporation owns two residences in the Southern United States. The two residences are owned through a Canadian corporation for U.S. estate tax purposes.
• 2. Both residences are vacation properties. One residence is used solely by the taxpayer during the winter months. The other residence (which is within four blocks from the main residence) is used solely by the taxpayer's servants. The sole responsibility of the servants is to serve the taxpayer while the taxpayer is in the U.S.
• 3. The taxpayer does not pay rent to the corporation at the present time, however for a period of time in the past the taxpayer did pay rent to the corporation.

In this regard you have requested our views as to whether the ownership of two residences and the fact that the corporation received rent from the shareholder in the past, would jeopardize the corporation's status as a Single Purpose Corporation.

Our Comments

Our response to question 20 at page 606, of the 1980 Annual Tax Conference Round Table discussions, set out an administrative position regarding shareholder benefits where a residential property situated in the United States is owned by a "Single Purpose Corporation". This response stated that no benefit would normally be assessed to a shareholder where all of the following conditions are met.

• 1. The corporations's only objective is the holding of property for the personal use or enjoyment of the shareholder.
• 2. The shares of the corporation are held by an individual or an individual and persons (other than a corporation) related to the individual.
• 3. The only transactions of the corporation relate to its objective of holding property for the personal use or enjoyment of the shareholder.
• 4. The shareholder would be charged with all the operating expenses of the property by the corporation, with the result that the corporation would show no profit or loss with respect to the property on any of its returns.

Subsequently, a fifth condition was added as follows:

• 5. The corporation acquired the property with funds provided solely by the shareholder and not by virtue of his holdings or that of a related person in any other corporation.

It is our opinion that the corporation, in the above noted scenario, would not be a Single Purpose Corporation because all of the five conditions set out above have not been met. More specifically, the reasons for our position are as follows:

• a) The question posed in the 1980 Round Table made reference to " ... a condominium or other residential property located in the United States ... held by a Canadian corporation for the occupancy of the corporation shareholder."
• The implication of this question and the response is that only one residential property actually occupied by the shareholder could exist, otherwise the corporation would not qualify as a Single Purpose Corporation.
• Since the corporation has two properties one of which is not occupied by the corporation shareholder, the corporation has exceeded the Department's guidelines.
• b) The payment of rent by the corporation shareholder to the corporation would indicate that the corporation had other purposes for its existence and was not a Single Purpose Corporation.
• c) In addition to the above, there is no indication that the shareholder was charged with all of the operating expenses or that he acquired the properties with his own funds as required by 4 and 5 above.

We trust our comments will be helpful.