Principal Issues: A benefit is conferred by a corporation to the child of the shareholder of a corporate shareholder of Opco. Should the value of the benefit be included in the income of the corporate shareholder, of the shareholder of the corporate shareholder or of the child of the shareholder of the corporate shareholder?
Position: There are situations where the value of the benefit would be included in the income of the corporate shareholder of Opco. In other situations, the value of the benefit would be included in the income of the shareholder of the corporate shareholder of Opco.
Reasons: Question of fact.
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XXXXXXXXXX 2016-066684 Sylvie Labarre, CPA, CA December 6, 2016
Dear Sir,
Subject: Benefit conferred on a person related to a shareholder
This is in response to your e-mail of September 20, 2016 in which you asked whether subsection 56(2) or subsection 246(1) applies to the following hypothetical situation.
Unless otherwise indicated, all statutory references herein are references to the provisions of the Income Tax Act.
Hypothetical situation
1. Opco is a Canadian-controlled private corporation.
2. Opco carries on a business of acquiring rental properties for conversion into condominium units for resale.
3. Opco is held by Holdco A, Holdco B and Holdco C, owned by A, B and C, respectively.
4. A, B and C deal with each other at arm's length.
5. None of the shareholders controls Opco in any manner whatsoever.
6. Holdco A holds 40% of the issued and outstanding shares in the capital of Opco; Holdco B holds 40% of the issued and
outstanding shares in the capital of Opco; and Holdco C holds 20% of the issued and outstanding shares in the capital of Opco.
7. Opco disposes of a condominium unit for $250,000 to B's child, whereas the market value of that unit is $500,000 at the time of disposition.
8. Opco does not enter into any other transactions with its shareholders, with A, B, C, or with their respective family members.
Question
You wish to know whether subsection 56(2) or 246(1) would apply in this hypothetical situation and who would be liable to tax under one of those statutory provisions.
Our comments
This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
In a situation where it would not be possible to conclude that the benefit conferred by Opco on B's child would be a benefit which Holdco B indirectly conferred on B or B’s child, we are of the view that Holdco B could be taxed in respect of that benefit. Indeed, according to our understanding of the facts, B's child would not deal at arm's length with Holdco B, which would be a shareholder of Opco. Thus, pursuant to paragraph 15(1.4)(c), the value of the benefit conferred by Opco on child B would be deemed to be a benefit conferred on Holdco B by Opco. Subsection 15(1) would therefore apply to include the value of the benefit in the income of Holdco B.
On the other hand, if the benefit had been indirectly conferred by Holdco B on B or B’s child, subsection 246(1) could apply to include in B's income the value of that benefit. This benefit would have been included in B's income under subsection 15(1), if the benefit had been conferred directly by Holdco B, because of the application of paragraph 15(1.4)(c).
To determine whether Holdco B indirectly conferred on B or B’s child the benefit that Opco has conferred directly requires an analysis of all the facts relating to this situation. In this regard, we generally consider that a corporate shareholder indirectly conferred a benefit on a person where the corporate shareholder had an influence on the company that directly conferred the benefit. In some situations, it could be obvious that the corporate shareholder has an influence, such as, for example, controlling the company directly or indirectly. On the other hand, in other situations, it would be necessary to examine all the relevant facts. In a situation like the one you described, we would query why the children of B, B and/or Holdco B were the only ones benefited by Opco.
In order to respond to a question on subsection 56(2), it would be necessary to know who gave the instructions or with whose concurrence the disposition of the condominium unit occurred. Since Holdco B would have been taxed on the benefit under subsection 15(1) if it had received it directly, subsection 56(2) could also apply in respect of Holdco B if the conditions for its application were satisfied. On the other hand, if the benefit had been granted by Opco in accordance with B's instructions or with B’s concurrence, all the facts surrounding the situation would need to be obtained in order to determine whether subsection 56(2) could apply to include the value of the benefit in B's income. Indeed, all these facts should be examined to determine whether B should have included an amount in B’s income if Opco had made the transfer directly to B. If that were the case, subsection 56(2) would apply.
We trust that our comments will be of assistance.
Stéphane Charette, CPA, CMA, MBA.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch