Principal Issues: Whether ss. 15(1), 15(7) and 212(2) and par. 214(3)(a) of the Act apply in a situation where a non-resident corporation permits its non-resident shareholders to use a real estate property on a rent-free basis?
Position: The value of the benefit, if any, would generally be subject to a Part XIII tax.
Reasons: Interpretation of the Act and previous positions
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 6 - Shareholder benefit and Canadian ownership held by a non-resident corporation for non-resident shareholders
Technical Interpretation 9134125 (footnote 1) specified that it is arguable that a nexus with Canada attributable to the presence of a property located in Canada was sufficient to trigger the application of paragraph 214(3)(a) and subsection 212(2) to impose non-resident withholding tax, where the corporation is a non-resident of Canada, and its shareholders are also non-residents of Canada.
Paragraph 214(3)(a) deems there to have been paid as a dividend any amount that would have been considered a benefit under subsection 15(1) if the shareholder had been resident in Canada. Subsection 212(2) subjects that dividend to withholding tax.
Questions to the CRA
Does that Interpretation still reflect the position of the CRA?
Can you explain the tax consequences in terms of tax benefits and taxation under subsections 15(1), 15(7), 17(1), 212(2) and paragraphs 212(13)(a), 212(1)(d) and 214(3)(a) or other provisions of the Income Tax Act where a Canadian property is held by a non-resident corporation for use by its non-resident shareholders?
CRA Response
The questions submitted relate to a situation involving the use free of charge and for personal purposes by a non-resident person of a property located in Canada held by a non-resident corporation of which the person is a shareholder. If the person paid rent to the corporation for the use of the property, the person would be deemed, in respect of that payment, to be a person resident in Canada pursuant to paragraph 212(13)(a). Thus, the corporation would be liable for Part XIII tax under paragraph 212(1)(d).
In that context, it appears to us that the facts of the particular situation submitted generally support the proposition that the corporation conferred a benefit the value of which, if any, could be included in computing the income of the non-resident person for the purposes of the application of the Act. Indeed, subsection 15(7) makes subsection 15(1) applicable whether or not the corporation has been resident in Canada or has carried on a business there. Thus, we are of the view that in the circumstances of this case, subsections 15(1), 212(2) and paragraph 214(3)(a) would be likely to subject the non-resident to Part XIII tax.
We recognize that the relevant provisions applicable in this case are broadly worded. Interpreted literally, they may have an overbroad and inappropriate scope depending on the facts of a particular situation. However, it appears to us that a textual, contextual and purposive interpretation of these provisions applied to the particular situation submitted supports our conclusion.
We would note alternatively that, in light of the particular facts of a particular situation, section 247 could be applicable. A transfer pricing adjustment could result in the non-resident corporation being subject to Part XIII tax pursuant to paragraphs 212(1)(d) and 212(13)(a).
Yannick Roulier
(613) 957-2134
2012-045124
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CRA, Technical Interpretation 9134125, September 21, 1992