Youngman, in addressing a shareholder’s personal use of the corporation’s luxury apartment (i.e., where it was difficult to use the "reasonable rent" method) stated that, in such a case, the method based on a return of capital (calculated on the greater of the cost or FMV of the property) plus the operating costs paid by the corporation should be used. In the context of current CRA tax audits, what criteria are used to determine the rate of return on capital used? CRA responded:
The "imputed rent" is determined by multiplying the greater of the cost or fair market value of the property by the "normal rate of return" and adding to this product the operating costs related to the property.
The "normal rate of return" is not necessarily the rate prescribed under ITR section 4300. …
The following are some elements that may be considered by the CRA in determining the "normal rate of return" in a particular situation:
- The rate of return that the corporation could earn on the capital invested to acquire the property made available to its shareholder;
- The rate of interest on a loan that the shareholder would have received from a person with whom the shareholder deals at arm's length if the shareholder had borrowed personally to acquire the property made available to the shareholder.
In general, the normal rate of return should be a market-determined rate.