| 19(1) | File No. 5-8299 |
| M. Eisner | |
| (613) 957-2138 |
February 23, 1990
Dear Sirs:
This is in reply to your letter of June 20, 1989. We apologize for the delay in replying.
You have asked us a number of questions with respect to the following hypothetical situation:
1. A property is owned 505 by an individual and 505 by a corporation. The corporation is owned 1005 by the same individual.
2. Excluding the manner in which the property is owned, the portion of the property used personally by the individual would qualify as his "principal residence" pursuant to the definition of this term in paragraph 54(g) of the Income Tax Act (the "Act").
3. The corporation and the individual have a written agreement under which the corporation is entitled to the sole and exclusive use and occupation of the portion of the property used in its business and is responsible for all costs relating to that portion of the property. Similar terms are applicable to the individual. The agreement also provides that the proceeds on the eventual sale of the property will be allocated to each party based on the value of the principal residence portion of the property in relation to the total value of the property.
From the information you have supplied, it is our understanding that pursuant to the legal ownership of the property in question, the corporation and the individual each own an undivided interest in the property. Under this type of ownership, each co-tenant has a right to occupy the property in respect of all its areas and neither party can point to a particular part which represents his share of all the areas. It is also our general understanding that while an agreement such as that in 3 above may establish occupation rights between the two owners, it would not affect the form of ownership. The following comments have been made on the basis that this is, in fact, the case.
Your first question concerns whether the entire portion occupied and used by the individual could qualify as a principal residence within the meaning of paragraph 54(g) of the Act. With respect to this issue, paragraph 3(b) of Interpretation Bulletin IT-120R3 states that to qualify as a principal residence of a taxpayer, the property must be owned solely or jointly with another taxpayer. As a consequence of this position, the Department would view the entire portion occupied and used by the individual as qualifying as his principal residence for the purposes of paragraph 54(g) of the Act assuming that the fair market value of this portion does not exceed 50% of the fair market value of the property as a whole.
We note that the proceeds of disposition of the principal residence portion of the property would be the same proportion of the entire proceeds that the fair market value of the principal residence portion would be of the fair market value of the entire property at the time of disposition.
Your second question concerns whether the corporation's interest in the property qualifies as an asset used in an active business for the purposes of the definition of "small business corporation" in subsection 248(l) of the Act. In this regard, our general position is set out in paragraph 5 of IT-486R which indicates that an asset is used in a business if its primary or principal use (i.e., more than 50% of its use) is in respect of that business. As a result of our preceding comments concerning the manner in which the property is owned and since the "more than 505 of its use" requirement is not satisfied, no part of the value of the corporation's interest in the property would be included with respect to the "all or substantially all" requirement in the definition of "small business corporation" in subsection 248(1) of the Act. We also note that this position, which predates the enactment of section 110.6 of the Act, is currently under review for the purposes of determining whether it should continue to be applicable for the purposes of that section.
With respect to the last issue you have raised, case law has established that a benefit may be conferred on an individual under subsection 15(1) when the individual, as shareholder of a corporation, has the use of corporate property. The amount of the benefit will depend on the facts of the particular case.
We trust that the foregoing comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch