| 19(1) | File No. 5-8265 |
| M. Vallée | |
| (613) 957-2093 |
September 11, 1989
Dear Sirs:
Re: Subsection 15(1) of the Income Tax Act (the "Act")
This is in reply to your letter, dated June 21, 1989, wherein you requested a technical interpretation concerning the application of subsection 15(1) of the Act in the following hypothetical situation.
Some of your clients are interested in acquiring or transferring vacation property through a holding corporation. The corporation's only function would be the holding of property for the personal use or enjoyment of shareholders. Each shareholder would be charged with a pro rata share of the operating expenses of the property, with the result that the corporation would report no profit or loss with respect to the property on its income tax returns.
You submit that there is no benefit, within the meaning of subsection 15(1) of the Act, where shareholders contribute property to a single purpose corporation on the basis that the property will be held for the personal use or enjoyment of the shareholders and the operating expenses of the property will be borne by the shareholders. In addition, from a policy perspective, you submit that there is no reason to assess a benefit in circumstances where the holding of property through a corporation is implemented merely to accommodate a situation where there are many individuals who have an interest in property.
Our Comments
We cannot agree with your opinion. As stated in response to question 14 at the 1985 Revenue Canada Round Table, the Department has always considered that a benefit is conferred where a corporate property is held solely for the personal use of a shareholder, whether or not the shareholder has advanced the purchase price to the corporation. The extent to which the shareholder has paid related operating expenses may be relevant in determining the value of the benefit but not whether there is a benefit.
In general, once it has been decided that a benefit has been conferred on the shareholder, the value of the benefit will usually be calculated using the fair market rental value approach. If such a value cannot be established, an imputed value will be determined as reflected in Woods v. M.N.R. 85 DTC 479 (TCC).
In response to question 20 of the 1980 Annual Tax Conference Round Table discussions, we set out an administrative position regarding shareholder benefits where a residential property situated in the United States is owned by a "Single Purpose Corporation". This response stated that normally no benefit would be assessed to a shareholder where all of the following conditions are met:
1. The corporation's only objective is the holding of property for the personal use or enjoyment of the shareholder.
2. The shares of the corporation are held by an individual or an individual and persons (other than a corporation) related to the individual.
3. The only transactions of the corporation relate to its objective of holding property for the personal use or enjoyment of the shareholder.
4. The shareholder would be charged with all the operating expenses of the property by the corporation, with the result that the corporation would show no profit or loss with respect to the property on any of its returns.
Subsequently, taxpayers were advised that the 1980 position may not apply to situations where funds are advanced to the corporation for the purchase of the property by someone other than the shareholder (Q. 14 - p. 49:8, 1985 Annual Tax Conference Round Table).
The 1980 and 1985 positions described above are still valid. Consequently, in a particular situation where all of the conditions set out in 1980 and 1985 were not satisfied, we would consider that a benefit had been conferred, the value of which would be includable in the income of each of the shareholders by virtue of subsection 15(1) of the Act. In addition, we have recently confirmed to taxpayers that the exception will not be applicable where the corporation acquires the subject property pursuant to a subsection 85(1) election.
These comments represent our general views with respect to the subject matter of your letter and are not advance income tax rulings. They are provided pursuant to the practice described in paragraph 24 of Information Circular 70-6R dated December 18, 1978.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch