Principal Issues: In a given situation, where the parents of the shareholder of a corporation have the exclusive use of a residence owned by the corporation at no charge, whether it could be considered for the purposes of subsection 15(1) that the corporation conferred a benefit either to the shareholder or the parents?
Position: Yes, to the shareholder.
Reasons: Subsection 15(1) could not apply to the parents since they are not shareholders or contemplating becoming shareholders of the corporation. Subsection 15(1) could apply to the shareholder, because of paragraph 4 of IT 432R2 and that in a situation such as the given situation the CRA would assume that the corporation gives the exclusive use of the house free of charge according to its shareholder's direction.
XXXXXXXXXX 2008-026416
Marc LeBlond
June 2, 2008
Dear Sir,
Re: Application of subsection 15(1) of the Income Tax Act
This is in response to your email of December 21, 2007 in which you asked us for our comments on the above subject in the situation described below. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situation described in your letter and summarised below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions being completed, you should submit all relevant facts and documents to the appropriate Tax Services Office for their opinion. However, we are able to offer the following general comments that may be of assistance to you. It should be noted that the application of one or more provisions of the Act generally requires the analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only summarily describes a particular hypothetical situation, the comments we make below may not apply in full in a given particular situation.
Particular Situation
- A corporation ("Opco"), a "taxable Canadian corporation", as defined in subsection 89(1), has only one shareholder (the "Shareholder").
- Opco carries on a farming business and owns a residence ("Residence").
- The parents (the "Parents") of the Shareholder live in the Residence without paying rent.
We have assumed that the Parents in the particular situation:
(i) are not employees of Opco;
(ii) have not rendered services to Opco since they ceased to be shareholders of Opco;
(iii) are not in the process of becoming shareholders of Opco; and
(iv) have the exclusive right to occupy the Residence.
Your questions
Your first question is whether, in the particular situation, for the purposes of the application of subsection 15(1), Opco could be considered to confer a benefit on either the Shareholder or the Parents.
Secondly, you asked us whether, in the particular situation, the expenses related to the Residence are deductible in computing Opco's income or whether they are not deductible because of the application of paragraph 18(1)(a).
Finally, you asked whether our answers to the first two questions would be different if the Parents had received the right to live in the Residence upon or after the sale of their Opco shares to the Shareholder.
Answer to your first question
In our view, in the particular situation, for the purposes of applying subsection 15(1), Opco could be considered to confer a benefit on the Shareholder at a particular time in a taxation year. On the other hand, we are of the view that, in the particular situation, subsection 15(1) would not apply to the Parents. Our conclusions are based on the above assumptions and the following observations.
The position of our Directorate is to rule on the potential application of subsection 15(1) and subsections 56(2) or 246(1) on a case-by-case basis after a full review of all the facts and circumstances relating to a particular situation. However, we are able to offer the following general comments that may be of assistance to you.
For the purposes hereof, the relevant parts of subsection 15(1) read as follows:
If, at any time, a benefit is conferred by a corporation on a shareholder of the corporation … or on a contemplated shareholder of the corporation, then the amount or value of the benefit is to be included in computing the income of the shareholder … for its taxation year that includes the time, except to the extent that the amount or value of the benefit is deemed by section 84 to be a dividend
[...]
[Emphasis added]
It follows from subsection 15(1) that it applies only to a shareholder or a person in the course of becoming a shareholder. Therefore, in the particular situation you have submitted, subsection 15(1) could not apply to the Parents since they are not shareholders of Opco or in the process of becoming shareholders of Opco.
Interpretation Bulletin IT-432R2- "Benefits to Shareholders" describes the position of the Canada Revenue Agency ("CRA") on the application of subsection 15(1). Paragraphs 4 and 5 of Interpretation Bulletin IT-432R2 read as follows:
4. Generally, when “property”, as defined in subsection 248(1), is transferred by a corporation to or on behalf of a shareholder for inadequate consideration or no consideration, a benefit will have been conferred on the shareholder under subsection 15(1) unless one or more of the specific exceptions described in 2 above apply.
5. If a transaction involving a corporation and a shareholder is a bona fide business transaction, there is no subsection 15(1) benefit to the shareholder. Normally, a transaction is considered to be bona fide when its terms and conditions are essentially the same as they would be if the transaction were entered into by parties dealing at arm’s length.
[Emphasis added]
Subsection 15(5) reads as follows:
For the purposes of subsection (1), the value of the benefit to be included in computing a shareholder’s income for a taxation year with respect to an automobile made available to the shareholder, or a person related to the shareholder, by a corporation shall (except where an amount is determined under subparagraph 6(1)(e)(i) in respect of the automobile in computing the shareholder’s income for the year) be computed on the assumption that subsections 6(1), 6(1.1), 6(2) and 6(7) apply, with such modifications as the circumstances require, and as though the references therein to “the employer of the taxpayer”, “the taxpayer’s employer” and “the employer” were read as “the corporation”.
[Emphasis added]
Subsection 15(5) sets out how to quantify the amount of the benefit to be included in computing a shareholder's income for a taxation year in respect of an automobile made available to the shareholder, or to a person related to the shareholder, by a corporation. In our view, it also follows among other things from subsection 15(5) that subsection 15(1) can apply where a corporation makes property available to a person related to a shareholder.
In the context of a private corporation, as is the case in the particular situation, the CRA would presume prima facie that the sole shareholder is the directing mind of the corporation's operations.
In our view, in light of the foregoing comments, in the particular situation, for the purposes of applying subsection 15(1), it could be considered that Opco confers, first and foremost, a benefit on the Shareholder, at a particular time in a taxation year, by granting the Shareholder's Parents the right to use the Residence for nil consideration, since Opco would be acting under the direction of the Shareholder in doing so.
Answer to your second question
In our view, paragraph 18(1)(a) could apply in the particular situation such that the Residence expenses would not be deductible in computing Opco's income. This is so because, in the particular situation, Opco is not using the Residence for the purpose of earning income from a business or property.
Answer to your third question
Our answers to the first and second questions would be the same whether or not the Parents obtained the right to reside in the Residence upon or after the sale to the Shareholder of their shares of the capital stock of Opco.
We hope that our comments will be of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.