17 July 1989 Income Tax Severed Letter 5-7446

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.

• 5- 7446 K. Astaphan (613) 957-2119

XXX

Attention: XXX

July 17, 1989

Dear Sirs:

Re: Shareholder Benefits - Use by Shareholder of a Corporate-Owned Property

This letter is in reply to your letter dated January 18, 1989 wherein you raised several questions in connection with the term "sole purpose corporation" used by the Department in the context of Question 20 of the 1980 Revenue Canada Round Table and Question 14 of the 1985 Revenue Canada Round Table.

Comments

It is the Department's position that the general rule with respect to the use or enjoyment by a shareholder of corporate-owned real estate is that a taxable benefit under subsection 15(1) of the Income Tax Act (Canada) (the "Act") will result when the fair market rental of the property is greater than the outlays incurred by the shareholder. It is only in the unique circumstances where all four conditions set out in the answer to Question 20 of the 1980 Revenue Canada Round Table are met that a shareholder benefit would not normally be assessed. This exception is an administrative concession by the Department and will not be available unless all of the said four conditions, reproduced now, are satisfied:

• 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 person (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 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.

The Department's administrative concession arose as a result of U.S. estate taxes, and was implemented only to facilitate the holding of foreign residential real property. The Department is not prepared to expand or alter this concession. Any transaction or structure that does not satisfy all of the above four conditions will not receive the benefit of the above administrative concession.

Your Questions

We now proceed to deal, seriatim, with the groups of questions put forth by you in your letter.

A) "Question 14 at the 1985 Round Table examined the issue to sole purpose corporations. A comment was made to the effect that the Minister may not treat the corporation as a sole purpose corporation where "funds are advanced to the corporation for the purchase of the property by someone other than the shareholder". Would this apply to situations where mortgage funds were advanced to the corporation by banks or other arm's length lenders or would it be restricted to situations where non-arm's length parties who loaned funds at less than a fair market rate of interest?"

• While sole purpose corporation treatment would generally not be denied in the situation of arm's length lending to the corporation, any other financing structure may result in the denial of the status as a "sole purpose corporation".

B) "If a U.S. corporation held the property, would that corporation be considered a sole purpose corporation if all the other criteria were met? Would a Canadian parent corporation whose only assets are 100% of the shares of this U.S. corporation and would otherwise meet all the criteria qualify as a sole purpose corporation?"

• i) Shares of U.S. Corporation Held Directly by the Canadian Taxpayer

No.

• ii) Shares of U.S. Corporation Held Indirectly by the Canadian Taxpayer
• Conditions 1) and 4) above, when read together, require that the corporation in fact holds only personal-use property. As the shares of the U.S. corporation would not be personal use property, the Canadian parent would not be a sole purpose corporation for these purposes.

C) "Would the corporation be treated as a sole purpose corporation if the property earns incidental rental revenue which is insufficient to cover the costs of ownership of the property during that time? Would there be a difference if the revenue is used to defer the costs of ownership or if it was paid directly to the shareholder?"

• Any transaction that results in the earning of rental revenue, whether or not "incidental", would result in condition 3) above not being met.

D) "Would the corporation be treated as a sole purpose corporation if the property earns incidental rental revenue which exceeded the costs of ownership of the property during the period the property was rented? Would it be possible to declare this income personally or to pay corporate tax and then declare dividends equal to the after tax revenue or in any other manner transfer the income to the shareholder (e.g. as salaries) so that the corporation will be treated as a sole purpose corporation?

See our response to your Question C.

E) "Would the corporation be treated as a sole purpose corporation if it held more than one personal use property but all expenses for each property were paid by the shareholder and the money for each property was advanced to the corporation by the shareholder?

No.

F) "Would the corporation be treated as a sole purpose corporation if the property was transferred by the shareholder to the corporation on a tax-deferred basis using a subsection 85)1) rollover?"

No.

G) "Real estate is often held in joint tenancy so that the property would pass to the surviving spouse on the death of the other. Would a corporation owned equally by spouses where the surviving spouse would receive the shares of the deceased spouse be treated as a sole purpose corporation?"

• Yes, generally, again provided that all the necessary conditions are otherwise met.

Other

• 1. With respect to the general request raised by you in the last paragraph of your letter, we would advise you to request such information through the appropriate channels under the Access to Information Act, R.S.C. 1985, c. A.1 as am.
• 2. These comments are given in accordance with paragraph 24 of Information Circular IC 70-6R, dated December 18, 1978.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch