7 July 1991 Income Tax Severed Letter - Administrative position regarding a single purpose corporation

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:

Re: Single Purpose Corporation

This is in reply to your letter dated May 23, 1991 requesting a technical interpretation with respect to the Department's administrative position regarding a "single purpose corporation" ("SPC").

The hypothetical facts of the situation presented in your letter follow:

* four individuals have set up a company to own a property that is held solely for their personal use;

* the property was acquired by the company using funds provided to it by the shareholders through share subscriptions;

* the expenses related to the property borne by the individuals have been substantial;

* the shareholders, between them, are not presently making full use of the property;

* in order to help cover some of the costs, they are considering making the property available to the other parties, when not used by them for a fee.

Specifically, you are enquiring whether or not the corporation would continue to be considered an SPC by the Department if the property is rented to non-shareholders.

Our Comments

The Department's position on single purpose corporations remains as stated in the answer to Revenue Canada Round Table question 20 in the 1980 Conference Report which was revised in the answer to Revenue Canada Round Table question 14 in the 1985 Conference Report. The position is as follows:

"The general rule is that a taxable benefit will result when the fair market rental of the property is greater than outlays incurred by the shareholder. However, a shareholder benefit will not normally be assessed where all of the following conditions are met:

• 1. The corporation'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.
• 5. The corporation acquired the property with funds provided solely by the shareholder and not by someone other than the shareholder."

The charging of rent, on a cost recovery basis or otherwise, would indicate that the corporation is not an SPC in that there are other purposes for its existence. In addition, the receipt of such rent would indicate that the shareholder would not be charged with all the operating expenses as required by condition 4 above.

We note that our position on single purpose corporations is administrative in nature and that there is no intention to expand it in any way.

You also inquired as to how one would go about calculating the amount of the benefit, if applicable. The taxable benefit in this case would be equal to the excess of the fair market rental value over any rent actually paid by the shareholders for the use of the property. No deduction on account of operating expenses in respect of the property would be allowed to the corporation except to the extent of the rent if any, paid by the shareholder, as the property was not acquired for the purpose of gaining or producing income. Where an equivalent fair market rental value for the residential property cannot be established because the residence is either so expensive or so luxurious that there would be no normal rental market, the value of the taxable benefit to a shareholder would be imputed as follows:

• a) all maintenance costs incurred by the corporation, plus
• b) a return on the higher of cost or fair market value of the property computed at the interest rate prescribed by regulation for the purposes of section 80.4 of the Income Tax Act, less
• c) any consideration paid to the corporation by the shareholder.

Only where a fair market rental cannot be established would the imputed value of the benefit be used.

We trust our comments will be of assistance to you.