| 19(1) | File No. 5-9007 |
| R.B. Day | |
| (613) 957-2136 |
January 22, 1990
19(1)
We are writing in reply to your letter of October 31, 1989, wherein you requested clarification of the Department's administrative position regarding Single Purpose Corporations ("SPC") and shareholder benefits under subsection 15(1) of the Income Tax Act.
In this regard, you referred to an article in the May/June 1989, edition of the Canadian Tax Journal which states, in part, that:
"In the transnational situation where an individual now wishes to transfer his U.S. vacation home to a Canadian corporation under the rollover provisions of section 85, it is hard to imagine that such a transfer would violate or fall outside the narrow scope of Revenue Canada's five stated conditions. Nevertheless, in a recently received private technical interpretation the department took the position that such a transfer would violate or fall outside the scope of its guidelines."
You have advised that you are aware of the five conditions that must be fulfilled with respect to our administrative position and have requested an explanation regarding the section 85 situation and other related matters.
Our Comments
The Department's position regarding SPC's is an administrative one. The fact that a section 85 rollover does not fall within the guidelines of that administrative position stems from the fact that we are not prepared to extend that position beyond the specific situation set out in the 1980 and 1985 Tax Foundation - Round Table questions and answers. If the property is transferred from the shareholder to the corporation on a taxable basis or the corporation acquires the property in an arm's length transaction, with funds provided by the shareholder, such that all of the five conditions are met, we would not apply subsection 15(1) to the shareholder to tax a shareholder benefit in respect of the property. Consequently, a section 85 rollover is not available to a shareholder who wishes to take advantage of the Round Table position.
With regard to your other questions, our views are as follows:
Because of the non-arm's length nature of the acquisition and disposition of the vacation property, it is our opinion that the utilization of the capital gains reserves of section 40 would not be acceptable in this scenario.
However, should a taxpayer choose to utilize the principal residence exemption under paragraph 54(g), the capital gains deduction under subsection 110.6(3), or offset capital losses of other years against any resultant capital gains under paragraph 3(b) or 111(1)(b), it is our view that such utilization would fall within the administrative position previously discussed.
We hope these comments will be of assistance.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch