Condo developers have structured to avoid income tax on their condo profits

Condo developers have been avoiding corporate income tax on the profits of condo sales.  All the condo sales profits are realized in a subsidiary LP of Projectco, the profits are lent to the developer, Projectco pays stock dividends to the developer to increase its basis in the Projectco shares, and the developer sells its Projectco shares to a third party with shelter before the LP year end for the year of the condo sales.

The sale price of the Projectco shares will exceed the amount by which Projectco's net asset value exceeds the full amount of its latent tax liability.  This has a complicating effect on the determination of the extent to which the developer will avoid gain on the Projectco share sale given the possibility (based on VIH) that the fair market value of shares of a corporation may be reduced by the full liability for tax on the sale of the corporation's assets and a CRA view that safe income is reduced by latent tax.

The developer takes the position that the safe income of Projectco includes its share of the partnership income up to the safe income determination time, notwithstanding that this income is not allocated to it. However, in 2012-0471021E5, CRA reversed position and indicated that the partnership safe income attributable to shares of a corporate partner to which the rules in section 34.2 apply should be the adjusted stub period accrual for the year (which, for the Projectco LP, would be nil, as none of the condo sales occurred in the prior fiscal period.)

There is at least one pending Tax Court case in which this structuring is being challenged.

Under the amended s. 95(2)(a)(i), it generally will be preferable for real estate development LLCs (or LPs) held by a CFA to be managed by a management subsidiary LP of the CFA, as each separate development entity would not need to use the equivalent of more than five employees of the management LP in its project.

Neal Armstrong. Summaries of Bruce Sinclair, "Current Topics in the Taxation of Real Estate Development", 2014 Conference Report, Canadian Tax Foundation, 12:1-24 under s. 55(2), s. 160 and s. 95(2)(a)(i).