Principal Issues: Whether a taxpayer, after transferring shares of a single-purpose corporation ("SPC") to an alter ego trust, will be subject to a taxable benefit under subsection 15(1) of the Income Tax Act if the taxpayer utilizes real property (that is held by the SPC and is situated in the United States) for personal reasons?
Position: Yes.
Reasons: Transfer of SPC's shares to an alter ego trust will be considered a disposition pursuant to paragraph (c) of the definition of "disposition" thus triggering the application of the second bullet in the CRA administrative policy outlined in Income Tax Technical News #31R2. The exception in paragraph (e) of the definition is not applicable.
XXXXXXXXXX 2011-039340 S. Bernards August 24, 2011
Dear XXXXXXXXXX :
RE: Alter ego trusts
This is in response to your letter dated January 20, 2011 wherein you requested confirmation that a taxpayer, after transferring shares of a single-purpose corporation ("SPC"), to an alter ego trust, will not be subject to a taxable benefit under subsection 15(1) of the Income Tax Act ("Act") if the taxpayer utilizes real property (that is held by the SPC and is situated in the United States) for personal reasons.
In the scenario described in your submission, the taxpayer currently holds the shares of the SPC and meets the requirements for grandfathering pursuant to the Canada Revenue Agency administrative policy described in Income Tax Technical News 31R2 ("ITTN #31R2").
In your view, the contemplated transfer of the shares of the SPC to an alter ego trust would be one where the beneficial interest in the shares would not change and the shares could ultimately revert back to the taxpayer at any time. Consequently, in your view, the transfer of shares to an alter ego trust should not change the CRA's administrative position with regard the taxpayer and thus the taxpayer's use of the US property for personal reasons would not trigger a shareholder benefit under subsection 15(1) of the Act as there would be no "disposition" as that term is defined in subsection 248(1) of the Act.
Our Comments
It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to provide the following general comments.
The term "single purpose corporation" is not a defined term for the purposes of the Act but rather is a term used to describe a corporation that where certain conditions are met, the shareholder will not be subject to a shareholder benefit being imposed under subsection 15(1) of the Act that would otherwise apply.
The CRA administrative practice of not assessing a subsection 15(1) benefit is outlined in ITTN#31R2 and will continue to apply to those arrangements that were in place on or before December 31, 2004 until the earlier of:
- the disposition of the particular U.S.-based real estate by the SPC; or
- a disposition of the shares of the SPC, other than a transfer of such shares to the shareholder's spouse or common-law partner as a result of the death of the shareholder.
In our view, the contemplated transfer of shares in the SPC would constitute a disposition of shares by the taxpayer, for purposes of our administrative policy. Accordingly, the administrative policy, as described in ITTN#31R2 would cease to apply to the taxpayer on the date on which the shares of the SPC are transferred to the alter ego trust.
This opinion is provided in accordance with paragraph 22 of the Information Circular 70 6R5. We hope our comments will be of assistance.
Yours truly,
Phil Kohnen
for Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch