| 921122 | |
| 24(1) | M.P. Sarazin |
| (613) 957-2118 |
Attention: 19(1)
July 6, 1992
Dear Sirs:
Re: Subsection 15(1) of the Income Tax Act (the "Act")
This is in reply to your letter dated April 9, 1992 wherein you requested our comments on the application of subsection 15(1) of the Act to a situation where a corporation holds assets such as artwork or antiques for the benefit of its shareholders. Specifically, you requested our views as to whether the Department's administrative position concerning "single purpose corporations" would apply to such a situation. Alternatively, in determining the amount of any benefit, pursuant to subsection 15(1) of the Act, that has accrued to a shareholder of the corporation, would the Department consider the amount of interest, computed with reference to commercial rates of interest, that could have been charged by the shareholder on any interest free debt provided to the corporation for the purpose of acquiring its particular assets and the amount of any maintenance and holding costs that are paid by the shareholder. You are of the view that the consideration of such amounts would be consistent with the approach taken by the Federal Court of Appeal in Youngman vs. The Queen, 90 DTC 6322.
Comments
The Department's administrative position regarding "single purpose corporations", as expressed in the response to questions 20 and 14 at the 1980 and 1985 Revenue Canada Round Tables, respectively, and confirmed in our response to question 9 of the 1989 Revenue Canada Round Table, only applies to a Canadian corporation that holds a U.S. real property on behalf of its shareholders. This position does not extend to other types of property.
The amount of the benefit conferred on a shareholder can only be determined subsequent to a review of all of the facts in each particular situation. In the case of artwork, antiques or any other luxury property it may be very difficult to find a fair market rental value which could be used in the determination of the shareholder benefit and, as stated in our response to question 33 at the 1987 Revenue Canada Roundtable, the benefit may have to be determined using a normal rate of return on the greater of the cost or fair market value of the property, plus the related operating costs, less any consideration paid to the corporation by the shareholder. However, the Department has accepted the findings in the Youngman case which generally supports this approach, subject to reducing the amount of the benefit by an amount of interest that would normally be paid by the corporation on the balance of any interest-free shareholder loan related to the property.
We hope that the above comments will be of help to you.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch