Principal Issues: 1. When computing the value of the benefit conferred to a shareholder by a corporation for the personal use of a property owned by the corporation, can the shareholder use the prescribed rate of interest provided for in subparagraph 4301(a)(i) of the Regulations as the normal rate of return?
2. If not, how is determined the normal rate of return?
Position: 1. The prescribed rate provided for in subparagraph 4301(a)(i) of the Regulations does not necessarily represent the normal rate of return. Therefore, when it is not representative, it cannot be used.
2. The Act does not contain any provision with respect to the normal rate of return used to compute the value of a benefit under subsection 15(1). The CRA does not have any guidelines to determine what constitutes a normal rate of return. It depends on the fact.
Reasons: 1. Question of fact.
2. Question of fact.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 4
Calculation of taxable benefit - acquisition of personal-use property by a corporation
Where property of a corporation is made available to a shareholder for the shareholder's personal use, a benefit under subsection 15(1) of the Act is generally considered to have been conferred on the shareholder.
The value of the benefit is usually based on the fair value of the property. However, where it is not appropriate to use such a method (as, for example, could be the case where acquiring a luxurious residence or yacht), the CRA position is that the value of the benefit corresponds to the amount obtained by multiplying a normal yield by the higher of
- the cost of the property; or
- its fair market value ("FMV").
Questions to the CRA
Can a taxpayer use the prescribed rate specified in subparagraph 4301(a)(i) of the Income Tax Regulations (footnote 1) as the normal yield?
If the prescribed rate cannot be used, how should the normal yield be determined? Should this rate depend on the actual return the company earns on its investments or its capital?
CRA response
When the CRA calculates a benefit conferred on a shareholder by multiplying the normal yield rate by the higher of the cost of the property and its FMV, the goal is to measure the benefit to the shareholder taking into account a reasonable return on the value or the cost of the property.
To this end, the prescribed rate defined in subparagraph 4301(a)(i) (“Prescribed Rate”) does not necessarily represent the normal yield rate on the value or cost of the property. Consequently, in situations where the Prescribed Rate is not representative of the normal yield rate, the Prescribed Rate will not be the rate which is used in calculating the value of the benefit to the shareholder.
The Income Tax Act does not provide any method for determining the normal yield rate in calculating a shareholder benefit. Furthermore, the CRA has not established criteria respecting this determination. The CRA will examine all the relevant facts in establishing the normal yield rate in a particular situation. The normal yield rate in a particular situation will be determined by the CRA Valuation team for personal property or the CRA Valuation team for real property.
Sylvie Labarre
2015-059554
October 9, 2015
FOOTNOTES
Due to the our system requirements , footnotes contained in the original document are reproduced below:
1 C.R.C., ch. 945 (« I.T.R. »).