Principal Issues: 1. What are the tax consequences for a corporation resulting from the transfer of a building in favor of its shareholders who hold the rights to occupy this building?
2. Are there any tax benefit conferred on shareholders when the building is transferred?
Position: 1. The transaction will be considered of a capital nature and the capital gain if any, will depend on the proceeds of disposition. This transaction should not result in a capital loss.
2. The amount of the benefit under subsections 15(1) and 246(1) will depend on the consideration paid for that transfer.
Reasons: In accordance with the provisions of the Act and previous positions.
XXXXXXXXXX
2020-084767
XXXXXXXXXX 2021
Dear Sir,
Subject: Request for advance tax rulings
XXXXXXXXXX
This is in response to your letter of XXXXXXXXXX requesting advance tax rulings on behalf of XXXXXXXXXX Corporation and its shareholders. We have also taken into account the information you sent us by email on XXXXXXXXXX as well as additional information provided in telephone conversations (XXXXXXXXXX).
Unless otherwise indicated, all statutory references below are to the provisions of the Income Tax Act, R.S.C. 1985, c. 1, (5th Supp.) (the "Act") and any reference to an amount expressed in dollars is a reference to such amount in Canadian dollars.
To the best of your knowledge and that of the taxpayers involved, none of the issues raised in this request:
(i) relates to a tax return previously filed by the taxpayers or a person related to them;
(ii) is under examination by a Tax Services Office or Tax Centre in connection with a tax return previously filed by the taxpayers or a person related to them;
(iii) is the subject of a notice of objection by the taxpayers or a person related to them;
(iv) is the subject of a pending or completed legal proceeding involving the taxpayers or a person related to them;
(v) is the subject of an advance ruling request previously considered by the Income Tax Rulings Directorate.
DESIGNATION OF PARTIES
In this letter, the names and corporate names of the taxpayers are replaced by the following names and corporate names:
"Owner Shareholders" means all shareholders holding proprietary leases from the Corporation conferring the right to occupy apartments and garages, being the persons listed below:
|
Name |
SIN or business number |
Apartment number |
Garage number |
Acquisition date |
|
XXXXX |
XXXXX |
XXXXX |
XXXXX |
XXXXX |
"Creditor" means XXXXXXXXXX;
"Corporation" means XXXXXXXXXX Corporation;
"SENC" means the XXXXXXXXXX General Partnership.
DEFINITIONS
In this letter, the following abbreviations and terms have the meanings described below:
"CRA" means the Canada Revenue Agency;
"capital property" has the same meaning as in the definition of capital property in section 54;
"FMV" means fair market value and refers to the highest price, in dollars, that two knowledgeable and prudent arm's length parties would agree on in the open market, neither party being under any compulsion to act;
"ACB" has the same meaning as in the definition of adjusted cost base in section 54;
"NPO" means a not-for-profit corporation described in paragraph 149(1)(l).
FACTS
1. The Corporation was duly incorporated on XXXXXXXXXX under the Canada Corporations Act. It is now governed by the Canada Business Corporations Act pursuant to the Certificate of Incorporation and Certificates of Amendment dated XXXXXXXXXX.
2. The Certificates of Incorporation and Amendment and the By-laws of the Corporation state that its sole purpose is to provide its shareholders with the right to occupy an apartment/garage. It is not the purpose of the Corporation to make a profit for the benefit of its shareholders.
3. The Corporation has been treated since its incorporation and until now as an NPO.
4. The authorized share capital of the Corporation consists of XXXXXXXXXX common shares without par value. The rights, privileges, conditions and restrictions of these shares include the following:
- The holders of such shares are entitled to vote at all meetings of shareholders on the basis of one vote for each share held.
- No dividends shall be declared by the directors.
- The holders of such shares shall be entitled to share in the remaining property of the Corporation in the event of its liquidation or dissolution.
- Any public invitation to subscribe for shares or debentures of the Corporation is prohibited. The number of shareholders of the Corporation is limited to XXXXXXXXXX.
5. On XXXXXXXXXX, pursuant to a deed of sale received by Mr. XXXXXXXXXX, the Corporation acquired from SENC a building located at XXXXXXXXXX for the sum of $XXXXXXXXXX and other considerations (described in paragraph 6 below), which SENC acknowledged having received. The deed of sale also stated that the Corporation did not assume the debt secured by a mortgage on the building and that this debt continued to be payable by the seller, SENC.
6. According to a resolution adopted on XXXXXXXXXX by the directors of the Corporation, the acquisition of the building was concluded in exchange for consideration corresponding to its FMV. It also stated that the Corporation paid the price for the acquisition of the building from SENC as follows: Corporation issued XXXXXXXXXX common shares of its capital stock to SENC and granted proprietary leases for each of the apartments and garages in the building located at XXXXXXXXXX.
7. The common shares issued were allocated according to the floor areas of the apartments and garages. For each of the XXXXXXXXXX garages, XXXXXXXXXX common shares were issued while for each of the XXXXXXXXXX garages, XXXXXXXXXX common shares were issued. With respect to the apartments, the allocation of the common shares issued was as follows:
Apartment number
Common shares
XXXXXXXXX X
XXXXXXXXXX
8. The leases referred to in paragraph 6 were all very similar, with the exception of, among other things, the name of the owner, the designation of the apartment and garage concerned and the number of shares involved. They had various characteristics, the most important of which can be summarized as follows:
a) They included an obligation that each of the owner-shareholders must hold the number of common shares of the Corporation's share capital allocated to the apartment and/or garage to which the right of occupancy related. Consequently, no person could sell, assign or otherwise dispose of the shares while retaining the leasehold interest permitting occupancy and habitation, or vice versa.
b) The leases expired on XXXXXXXXXX. However, they could be terminated before that date in certain situations:
- The Owner Shareholder ceases to hold the shares of the capital stock of the Corporation allocated to the apartment or garage to which the lease relates.
- One of the events described in sub-sections a) to e) of section 3.02 of the lease occurs. Those events are contingencies such as, for example, if the signatory becomes insolvent or bankrupt or defaults on its obligations.
- The event of expropriation of all or part of the building.
- The Corporation determines to sell the building. However, that decision is subject to a favourable vote by the XXXXXXXXXX of the Owner Shareholders holding at least XXXXXXXXXX% of the shares of the capital stock of the Corporation at a special meeting.
- At a special meeting, XXXXXXXXXX% of the Owner Shareholders holding at least XXXXXXXXXX% of the shares of the capital stock of the Corporation decide, for reasons other than those listed, to terminate it.
- At a special meeting, XXXXXXXXXX of the Owner Shareholders holding at least XXXXXXXXXX% of the shares of the capital stock of the Corporation, decide to terminate the leases for the purpose of converting the building into condominiums.
c) Owner Shareholders had various obligations (taxes, maintenance, insurance, etc.) with respect to the maintenance of their respective apartments and garages, which they could use personally or, upon approval, sublet.
d) The Owner Shareholders were required to contribute to the common expenses relating to the operation of the building. That contribution was determined according to the number of shares allocated to the apartment and garage under each lease in relation to the total number of shares in the share capital of the Corporation. It was made in the form of rent for current expenses and in the form of a contribution to the Corporation's capital for capital expenses and reserves.
e) The Corporation has the necessary powers to administer the current activities of the building. It undertook to keep it in good condition and to carry out maintenance and repairs and to obtain insurance coverage against damage.
9. On XXXXXXXXXX, the Corporation signed an agreement whereby it assigned to SENC all of its landlord rights and obligations under the proprietary leases it granted in respect of all of the interior and exterior apartments and garages in the building located at XXXXXXXXXX.
10. Pursuant to a Deed of Assignment dated XXXXXXXXXX, SENC pledged, with the consent of the Corporation, all of its shares, being XXXXXXXXXX common shares of the Corporation, and assigned as security all of the proprietary leases in favour of Creditor, in order to secure the repayment of a loan of $XXXXXXXXXX owed in favour of Creditor.
11. Effective XXXXXXXXXX, SENC proceeded to sell at FMV the XXXXXXXXXX common shares of the Corporation and the proprietary leases it held in favour of the Owner Shareholders in accordance with the Articles of Incorporation, Bylaws and Proprietary Lease Agreement.
12. SENC also repaid in full the $XXXXXXXXXX loan it had taken out with Creditor from the proceeds of those sales.
13. On XXXXXXXXXX, Creditor, having obtained repayment of its $XXXXXXXXXX loan, transferred the XXXXXXXXXX common shares of the Corporation and the proprietary leases attached to those shares back to SENC. The shares and proprietary leases were then transferred to the Owner Shareholders.
14. According to the articles of incorporation and amendments, as well as the by-laws and proprietary leases, the Owner Shareholders were required to disburse amounts to the Corporation in accordance with the standards set out in such documents, in order to provide for the payment of the costs relating to the building in the same way as a condominium corporation does for common costs, but no further.
15. Leases of property do not constitute a right of use or habitation for the purposes of civil law.
16. The total paid-up capital of the issued and outstanding common shares in the capital of the Corporation was very low because of the proprietary leases granted by the Corporation at the time of issue.
17. According to Mr. XXXXXXXXXX's appraisal report of XXXXXXXXXX, from the firm XXXXXXXXXX, the FMV of the property held by the Corporation was established at a nominal value of $XXXXXXXXXX due to the proprietary leases granted to the Corporation's shareholders. The ACB of the property to the Corporation was $XXXXXXXXXX due to the disposition of the usus and fructus of the units in the proprietary leases to SENC.
18. No dividends have been declared or paid to the shareholders, being the holders of the XXXXXXXXXX common shares of the Corporation.
19. All of the above parties are persons resident in Canada and are not related persons within the meaning of section 251, with the exception of Mr. XXXXXXXXXX, the holder of the occupancy rights to apartment XXXXXXXXXX, who is a non-resident of Canada, and the Owner Shareholders holding the occupancy rights to the apartments numbered XXXXXXXXXX, who, although related to each other, are not related to the other Owner Shareholders.
PROPOSED TRANSACTIONS
20. The Ownership Shareholders will amend the Articles of Incorporation of the Corporation to allow for the transfer of the property and to eliminate references to proprietary leases regarding the shareholding.
21. The Owner Shareholders will purchase, in undivided ownership, the property located at XXXXXXXXXX, held by the Corporation for a price of XXXXXXXXXX ($XXXXXXXXXX), as determined by the expert appraiser and described in paragraph 17. Subsequent to this acquisition, the Owner Shareholders will hold the property in undivided ownership, in proportions consistent with their shareholdings and leaseholdings immediately prior to the transfer. This acquisition of undivided co-ownership rights will result in the termination of the proprietary leases.
22. As a result of the new terms respecting the holdings, the co-owners will enter into and publish an undivided co-ownership agreement among themselves, the effect of which will be to enable them to share, by means of housing rights specifically linked to the undivided shares, the occupation of the apartments/garages as it was immediately prior to such transfer. Consequently, the undivided co-ownership agreement will stipulate all the provisions considered appropriate for henceforth governing the agreed undivided co-ownership by allowing the resale of the co-ownership interests and the possibility of mortgaging them separately from each other.
It is understood that the rights attached to the immovable will be distributed among the undivided co-owners according to the allocation that existed immediately before the transfer of the immovable to them.
23. The shareholders will retain their shares, which will have a minimal value.
PURPOSE OF THE PROPOSED TRANSACTIONS
24. The Owner Shareholders wish to acquire the building owned by the Corporation in undivided ownership. The proposed transactions therefore represent a solution allowing the Owner Shareholders to be the full owners of the building and not only holders of an innominate right resulting from the proprietary leases or an innominate right of enjoyment and occupation, thus allowing more adequate financing and easier management.
25. This undivided ownership agreement based on the rules of undivided co-ownership will allow the co-owners to hold their undivided share to which will be linked the right of occupancy and enjoyment of the apartment/garage to which they are entitled under their current proprietary lease, while allowing them to obtain mortgage financing with limited liability, due to the implementation of the XXXXXXXXXX, without the rights and obligations of one co-owner (particularly with respect to his mortgage financing) affecting the rights and obligations of the other undivided co-owners.
ADDITIONAL INFORMATION
26. The Corporation and its shareholders are all served by the XXXXXXXXXX Tax Services Office. However, all shareholders, who are individuals, are served by the XXXXXXXXXX Tax Centre, while shareholders who are corporations, i.e. XXXXXXXXXX and the Corporation, are served by the XXXXXXXXXX Tax Centre.
27. All owners of the shares and proprietary leases of the property reside in XXXXXXXXXX at the apartment number indicated in the table in the section "Designation of Parties" except for the following persons:
- XXXXXXXXXX
RULINGS
Provided that the statement of facts, proposed transactions and purposes of the proposed transactions described in this letter are accurate and constitute full disclosure of all relevant facts, proposed transactions and purposes of the transactions affecting the decisions rendered, and provided that the proposed transactions are carried out as described above, we rule as follows:
A. Provided that the property constitutes a capital asset of the Corporation, the sale of the property by the Corporation to the Owner Shareholders as described in paragraph 21, will be considered, in and of itself, to be a capital transaction.
B. To the extent that the FMV of the property and the proceeds of disposition are equal to or less than the ACB of the property, the transfer by the Corporation of the property subject to all rights of enjoyment and occupancy to the Owner Shareholders will not result in any capital gain to the Corporation under section 38 et seq. of subdivision c of Division B of Part I.
C. The transfer described in paragraph 21 will not give rise to any taxable benefit in the hands of the Owner Shareholders pursuant to subsections 15(1) and 246(1) to the extent that the FMV of the share of the real property so transferred to each of the Owner Shareholders so that the real property held in undivided ownership is equal to or less than the FMV of the consideration paid by such shareholder in respect of that transfer;
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R11 dated April 1, 2021, issued by the CRA and are binding on the CRA provided that the proposed transactions described in paragraphs 20 to 23 are completed by XXXXXXXXXX. These rulings are based on the current Act and do not take into account any proposed amendments to the Act.
SCOPE OF THE RULINGS GIVEN AND OTHER COMMENTS
For the purposes of this letter, only the facts, proposed transactions, and purposes of the proposed transactions described in this letter have been considered. All other relevant information affecting the decisions, including information contained in the documentation provided in support of your request, is considered to be undisclosed for the purposes of the decisions rendered.
Furthermore, the rulings issued should not be construed as an acquiescence on the part of the CRA that:
(a) the amount attributed to a property in the statement of facts and proposed transactions truly represents the FMV or ACB of that property or the paid-up capital amount of a share;
(b) we have considered any other potential tax consequences that may arise in connection with the facts and proposed transactions set out herein for the Corporation and the Owner Shareholders
c) the proprietary leases, as described in paragraph 8
i. meet the conditions set out in the definition of "principal residence" in section 54 and
ii. the gains from their respective dispositions, if any, qualify for the principal residence gain exemption pursuant to paragraph 40(2)(b). Such a determination cannot be made without examining the facts of each Owner Shareholder's particular situation.
(d) The Corporation complies with all the provisions of paragraph 149(1)(l).
A statement of our fees for the time spent on your case will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
For the Director
Business and Employment Income Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch