7 August 1990 Income Tax Severed Letter - Ownership by a single purpose corporation of two properties

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.

Dear Sirs:

This is in reply to your letter of June 8, 1990 concerning the ownership by a single purpose corporation (SPC) of two properties. We offer the following comments regarding your various questions.

• 1. Our response to Question 14 of the 1985 Conference Report, Revenue Canada Round Table confirmed our position regarding the holding of personal use property by a SPC, as stated in Question 20 of the 1980 Conference Report and added a fifth condition that the funds for the purchase of the property must be provided by the shareholder. Ordinarily the source of the shareholder's funds would not be a consideration. However, the Department's administrative position does not contemplate the situation where the shareholder has obtained an undue tax benefit by means of combining that position with any statutory provision. In the case of an interest free loan to the shareholder from an operating company, it appears section 80.4 would include an interest benefit in the shareholder's income, in which case the shareholder's source of funds would not be a consideration.
• 2. The Department's administrative position contemplates the holding of only one residential property by the SPC for the personal enjoyment of the shareholder. The purchase of a second property by the SPC would exceed the Department's guidelines. At this time the Department is not prepared to extend its administrative position. Where the period during which two properties are held by the SPC is short the amount of the benefit may not be material.
• 3. The SPC would not exceed the Department's "one property guideline" if it sold the first property and subsequently acquired another property providing this did not indicate a pattern of buying and selling properties which would be contrary to the SPC's objective of holding the property for the personal enjoyment of the shareholder.
• 4. The Department's administrative position does not contemplate the situation of a taxpayer having two SPCs with each holding a separate personal use property.
• 5. A newly incorporated SPC which purchases personal use property from another corporation (which no longer qualifies) could qualify for the Department's administrative position provided the guidelines are otherwise met.
• 6. As stated above the Department's administrative position does not contemplate the ownership of two properties. Whether the SPC qualified for the administrative position prior to the acquisition of the second property could only be determined after all the facts and details have been established and reviewed.
• 7. The fact that the second property in your hypothetical situation was not available for occupancy for a period of time may (depending on the specific details of the case) be relevant in determining the amount of the benefit. Furthermore the Department accepts the findings in the case of Youngman v. The Queen [[1990] 2 C.T.C. 10] 90 DTC 6322 that in determining the amount of the benefit the shareholder's interest free loan to the corporation to enable it to purchase the property should be taken into consideration. However the interest free loan is not relevant in determining whether or not there is a benefit. Ordinarily the fair market rent value method should be used to determine the amount of the benefit. The actual expenditure method was used in the Youngman case as there was no comparable house on the market in the area.

We trust our comments will be of assistance to you.