24(1)
903051
C. Tremblay
(613) 952-1361
19(1)December 18, 1990
Dear Sirs:
Re: Subsection 15(1) of the Income Tax Act (the "Act")
This is in reply to your letter of October 25, 1990, requesting a technical interpretation in respect of subsection 15(1) of the Act. You wish us to confirm your interpretation that for the purposes of subsection 15(1) of the Act, in cases where the Department considers that fair market value rental does not appropriately reflect the value of the shareholder benefit, that the rate of return that the corporation should expect, is based on the cost of the investment rather than the fair market value of the property at the time the benefit is being determined.
Our Comments
We cannot confirm your interpretation. The Department's position in respect of determining the amount of a benefit when corporate property is made available to a shareholder remains as stated in question 33 at the 1987 Canadian Tax Foundation Revenue Canada Round Table. Under subsection 15(1) of the Act, what is to be added to the income of the shareholder is the value of the benefit that he received rather than the cost of that benefit to the corporation. It is therefore necessary to find what the shareholder would have had to pay for the same benefit in the same circumstances if he had not been a shareholder of the company. In arriving at the value of the benefit conferred, a reasonable rate of return on the funds that the Corporation would otherwise have earned as well as the saving the shareholder avoided by not acquiring the property
personally are considered in determining the benefit. Consequently, it does not follow that the value of the shareholder benefit be based solely on the rate of return the corporation should expect on the cost of the investment; the corporation's equity in the property (based on fair market value) may better represent the true measure of the value of the benefit conferred on the shareholder at the time the value is being determined. Moreover, the court in Lloyd Youngman v Her Matjesty the Queen (FCTD) 86 DTC 6589 stated:
"The Corporation's equity in the residence on Shadow drive represents, in my view, the true measure of the benefit conferred on the plaintiff".
Accordingly, in our view, where the fair market value rental does not provide a reasonable return on the value or the cost of the property, the amount or value of the benefit being conferred on the shareholder is more indicative of the true value of the benefit when it is determined by a normal rate of return on the greater of the cost or the fair market value of the corporate asset plus the operating costs, less any consideration paid to the corporation by the shareholder.
We trust that our comments will be of assistance to you.
Yours truly,
for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch