Principal Issues: [TaxInterpretations translation] Can the CRA specify the criteria for determining the rate of return to be used to measure the taxable benefit in respect of property held by a corporation where the property was acquired primarily for the use of a shareholder of the corporation?
Position: No.
Reasons: General comments.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 46
Property owned by a corporation, personal use by a shareholder and the Youngman decision:
The Federal Court of Appeal's decision in Lloyd Youngman v. The Queen (footnote 1) provides a benchmark for measuring the taxable benefit from property held by a corporation where the property was acquired primarily for the use (and availability) of a shareholder of the corporation. In particular, it sets out how the taxable benefit should be computed in the context where it is difficult to use the "reasonable rent" method for such property. Indeed, it may be difficult to find a "comparable rent" for a particular property (such as a luxury residence). Therefore, the Federal Court of Appeal in Youngman 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 today's environment of exceptionally low interest rates, the use of the prescribed rate as a rate of return on capital may be clearly inappropriate, although it may have been very reasonable in an earlier era.
Question to the CRA
In the context of current CRA tax audits, what criteria are used to determine the rate of return on capital used and can you provide us with specific examples of rates?
CRA Response
As provided in paragraph 11 of Interpretation Bulletin IT-432R2, where the value of the benefit from property made available to a shareholder for personal use cannot be determined using the "fair market rent" for the property, particularly if that fair market rent does not provide a reasonable rate of return based on the value or cost of the property, the "imputed rent" method should be used to determine the amount of the benefit conferred on the shareholder under subsection 15(1).
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 CRA determines the normal rate of return in a particular situation based on the facts and circumstances of each case and the market rates in effect at the time.
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.
No specific examples can be provided as the case law simply states that the amount is to be reasonable in the circumstances.
Response prepared in collaboration with:
Kristy M. Nguyen
Income Tax Section - Group 1
Technical Applications and Valuation Division
Audit Professional Services Directorate
Compliance Programs Branch
Income Tax Rulings Directorate officer responsible:
Guy Goulet
(613) 946-3499
October 8, 2010
2010-037325
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 (1990) DTC 6322