| December 19, 1990 | |
| TORONTO DISTRICT OFFICE | HEAD OFFICE |
| G. Cappella | Rulings Directorate |
| Audit Review | R.D. Mundell |
| (613) 952-0243 | |
| Attention: Business Enquiries | |
| Group 148 2-1 | 7-903366 |
SUBJECT: 24(1) Sale and Purchase Transaction
This is in reply to your opinion request of November 23, 1990 concerning whether or not a certain transaction, between 19(1) constitutes a valid sale and purchase transaction.
24(1)
You have suggested that there was no valid sale and that the property is still owned by 19(1)
Our Comments
24(1)
In this situation, since the corporation has acquired a residence occupied by one of its shareholders, it would appear that there is personal use of corporate property by individuals. First it must be determined what, if any, personal use is made of the house. If the taxpayers can claim a business reason for every use of the house and the Department cannot demonstrate any other use, no assessment of any taxable benefit is warranted. If there is in fact personal use, then it is necessary to determine whether 19(1) was in his capacity as shareholder (open to a section 15 assessment) or as employee (open to a section 6 assessment) when the house was made available. It is also necessary to determine the purpose for which the house was acquired by 24(1) business or personal. Reasonable expectation of profit from the rental would be one of the criteria to look at. If the house was acquired for business purposes, 19(1) regardless of his capacity could only be assessed for a benefit equal to the incremental cost to 24(1) of making the house available. These would usually be variable as opposed to fixed costs. If the acquisition was for personal use by an employee, the benefit is equal to the rent 24(1) could obtain in the open market. On the other hand, the benefit calculated on the house, if acquired for personal use by a shareholder, is determined by applying the prescribed rate to the greater of the cost or fair market value of the property. This last situation would be relatively rare as shareholder/employees can usually make an argument that whatever benefits there are, are part of remuneration package.
If it can be established that 24(1) had no business purpose in buying the house, the limitations of paragraph 18(1)(a), with regard to the expenses connected to the property, would disallow those deductions. These could be found to be for a purpose other than gaining or producing income from the business or property. Even if the house was acquired for business use, the amount of the deductions should be reviewed to see if they are reasonable pursuant to section 67.
Finally, the fact that 24(1) does not prevent it from carrying on any other business as well. The possible disallowance of deductions, pursuant to paragraph 18(1)(a), would prevent 24(1) from applying the rental loss against any other income in computing taxable income.
We trust our comments will prove helpful.
ChiefServices, Public Utilities & Exempt Corporations SectionBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch
c.c. R. Roy A.D.M.