Subsection 15(1)

A non-resident corporation owned by a non-resident individual purchases a Canadian vacation home that is available for use by that individual and family members. If no rent is paid, how would any taxable benefit relating to the use of the property be computed and what would be the tax consequences?

CRA first noted that s. 15(7) provided that s. 15(1) could apply where the corporation was non-resident, that s. 15(1.4)(c) provides that, a benefit conferred by a corporation on an individual is an s. 15(1) benefit conferred on a shareholder with whom the individual does not deal at arm’s length, and that s. 214(3)(a) deems the benefit to be a dividend paid to the non-resident shareholder for Part XIII tax purposes.

Regarding the computation of the benefit, in cases where the fair market rent did not provide a reasonable return on the value of the property, the amount of the benefit is to be determined using the imputed rent approach – which in general entailed multiplying what would generally be a normal rate of return for the non-resident corporation by the greater of the cost and fair market value of the property, and adding operating costs other than interest paid on liabilities connected with the property. CRA accepted (after referencing Youngman) that an interest-free loan by the shareholder to the corporation, that was used by the corporation to fund the acquisition of the property, may be deducted from the amount on which the rate of return was applied.

An individual, a sole shareholder of a corporation, borrows money in order to earn business or property income. To secure his personal loan, his corporation grants a mortgage on a building it owns. The shareholder makes all principal and interest payments on his loan, and also pays his corporation a reasonable fee for the grant of the security (a “guarantee fee”). CRA stated:

[T]he CRA would not generally apply subsection 15(1) solely as a result of the granting of a guarantee where the CRA is of the view that the individual pays the individual’s corporation a reasonable guarantee fee as consideration for the individual’s corporation granting a mortgage guarantee of a personal loan of the individual.

Mr. A owns all the shares of a Canadian-controlled private corporation (Holdco) owning a segregated fund insurance policy (the Policy) under which Mr. A is the life insured. In order to benefit from provincial creditor protection rules, Holdco named Mr. A’s spouse as a revocable beneficiary under the Policy. As the policyholder, Holdco receives the annual income and capital gains under the Policy. If the policy is terminated before Mr. A’s death, no benefits will be received by his spouse.

Can the CRA confirm that no immediate shareholder or other benefit arises from naming Mr. A’s spouse (or another related person) as beneficiary under the Policy? CRA responded:

[O]ur long standing position [is] that a shareholder benefit arises under subsection 15(1) … when a corporation pays the life insurance premiums on a policy pursuant to which the shareholder or a person related to that shareholder is the beneficiary of the policy. The amount of the benefit to be included in computing the shareholder’s income in a given taxation year is usually equal to the amount of the insurance premiums paid by the corporation for that year. …

Accordingly, given that a segregated fund policy is, by definition, a life insurance policy, we cannot confirm that no benefit arises in the described situation … . The question of whether a benefit under subsection 15(1) … has been conferred is generally one of fact to be determined on a case-by-case basis.

Background

A not-for profit corporation described in s. 149(1)(l) (the “Corporation”) governed by the CBCA acquired a building from a partnership (“SENC”), without assuming a mortgage on the building, in consideration for granting leases to the various apartments in the building and issuing common shares, allocated in proportion to the floor areas of their leased apartments. SENC pledged, with the consent of the Corporation, the leases and the common shares to the mortgagee.

SENC then sold the leases and the shares for their FMV to various persons (the Owner Shareholders) and used the proceeds to repay the mortgage loan. The Owner Shareholders were required to hold their common shares in proportion to the relative floor areas of their apartments and to bear their share of costs relating to the building in the same way as a condominium corporation does for common costs, but no further.

Accordingly to a third-party appraisal, the FMV of the building is nominal, due to the effect of the leases to the shareholders

Proposed transactions

The Owner Shareholders will purchase undivided interests in the property in proportion to their relative shareholdings and leasehold interests, for purchase prices based on the property’s appraised value, as described above. Such acquisition will result in the termination of their leases.

Rulings

Including that the transfer to the Owner Shareholders would not result in a capital gain to the extent that the FMV of the property and the proceeds of disposition were equal to or less than the property’s ACB and that such transfer would l not give rise to any taxable benefit in the hands of the Owner Shareholders pursuant to ss. 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 was equal to or less than the FMV of the consideration therefor paid by such shareholder.

Under an RSU plan established by the U.S. public-company parent (“USCo”) of CanCo, awards of RSUs are made to participants, including CanCo employees, each February. The RSUs vest on a pro-rata basis over a three-year period and are payable upon vesting in common shares of USCo, except that USCo may, in its discretion, settle RSUs in cash.

CanCo reimburses (including through advance payments) USCo for the value of the shares issued or cash paid out by it, and other expenses relating to RSUs that are settled. In concluding that such Reimbursements by CanCo did not generate a benefit under s. 15(1) or 246(1) so as to attract Pt. XIII tax, the Directorate stated:

[T]he Reimbursements would be made pursuant to the Agreement in return for equivalent consideration paid by USCo to CanCo’s employees. CanCo will not confer a benefit on USCo nor suffer any net economic detriment, and the payment will not enrich USCo because of the amounts to be paid to CanCo employees by USCo.

Prior to the formal winding up of CFA2 into CFA1, it sold its assets at their book value (i.e., for less than their FMV) in exchange for a promissory note of CFA1 and the assumption of liabilities, with that note then being extinguished as a result of its assignment to CFA1 on the formal liquidation of CFA2.

CRA ruled that ss. 15(1), 56(2) and 246(1) will not apply (stating in its summary that "No benefit is being conferred.")

IT-432R2, para. 11 indicates that the value of a taxable benefit conferred on a shareholder respecting property made available by the corporation can usually be determined by multiplying a normal rate of return by the greater of the cost and fair market value of the property and adding the operating costs related to the property - but that the amount representing the greater of the cost and fair market value of the property may first be reduced by any outstanding interest-free loans or advances to the corporation made by the shareholder.

Although this position was not repeated in AD-18-01, CRA stated, after citing Youngman:

Where a shareholder grants an interest-free loan to the shareholder’s corporation and that corporation uses that amount to acquire an aircraft that is made available to that shareholder for the shareholder’s personal use, the CRA could accept in determining the available-for-use amount that the initial cost of the aircraft is first reduced by the amount of the interest-free loan that the shareholder made to the corporation to enable the corporation to acquire that aircraft. The result must, however, respect the principle set out in the Youngman decision.

A foreign affiliate (New FA) of a Canadian corporation (ACo) transferred all the shares of FA1 to a Canadian-resident subsidiary (BCo) of ACo in consideration for a note of BCo whose amount equalled the sum of the relevant cost base of the FA1 shares and the net surplus (being exempt surplus) of FA1 (such sum, the “Transfer Amount”). BCo then used share subscription proceeds received by it from ACo to repay the note, with New FA then distributing that cash to ACo and with ACo electing under Reg. 5901(2)(b) for the distributions to come out of New FA’s pre-acquisition surplus. CRA ruled inter alia as to the application of s. 93(1.11) to effectively convert part or all of the capital gain of New FA otherwise realized on its disposition of its FA1 shares into an exempt surplus dividend.

The ruling letter states:

The purpose for the transfer by New FA of its FA1 Shares to BCo … occurring at the Transfer Amount as opposed to occurring at their FMV, was not to confer a benefit on a person, but rather to address certain policy concerns of the CRA by restricting BCo’s aggregate ACB of its FA1 Shares to the Transfer Amount.

CRA ruled that none of the usual conferral-of-benefit provisions applied.

CRA noted respecting the transfer for no consideration of a critical illness insurance policy by Opco (which was the policyholder, beneficiary and had paid all the premiums) to its shareholder (so that the shareholder became the holder and beneficiary) to Holdco, that although no capital gain would arise on the transfer to Opco, under s. 15(1) “the value of the benefit could correspond to the FMV of the policy.”

The only issued and outstanding share of Opco (which has retained earnings of $500,000) is 1 Class A common share, with a fair market value of $1,000,000 owned by Mr. A. Opco issues to Mrs. A, for nominal consideration, 1 non-voting Class B preferred share, which is redeemable and retractable “for the fair market value for which it is issued” and entitled to discretionary dividends as and when declared.

In Scenario 1, Opco immediately declares and pays out a $100,000 dividend on the Class B preferred share, which would have the effect of reducing the FMV of Opco and the 1 Class A common share by the same amount.

In Scenario 2, Opco does not declare and pay the $100,000 dividend until after it has earns an additional $100,000 of income, and the FMV of Opco after the dividend is at least $1,000,000.

What would be the consequences for Opco and its shareholders of such issuance and dividend? CRA responded:

It is possible that…one could take the position that an economic advantage is being conferred by Opco to Mrs. A…[and] that subsection 15(1) applies upon the issuance of the Class B preferred share, particularly if the amount that is being paid by Mrs. A as consideration for the share does not represent the fair market value of such share at the time of subscription.

The value of the s. 15(1) benefit arising from the provision of property (e.g., a yacht or luxurious residence) to a shareholder may be computed by multiplying a normal yield by the higher of the cost of the property and its fair market value ("FMV"). If the prescribed rate in Reg. 4301(a)(i) cannot be used, how should the normal yield be determined? CRA responded:

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. …

[I]n 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 CRA will examine all the relevant facts in establishing the normal yield rate… .

Most of the income of a partnership has been allocated and distributed to a partner which is a personal trust, but CRA reallocates most of such income under s. 103 to the other partner, which is a corporation (subject to a lower tax rate than the trust). Notwithstanding that the trust partner has enjoyed income on which it is not subject to tax, CRA acknowledges that there is no obligation for the trust to make any reimbursement payment to the other partner. More generally, CRA acknowledges that the operation of s. 15(1), 51(2), 69(1), 74.1(1) or (2), 74.4(2), 75(2), 85(1)(e.2), 86(2), or 103 to attribute income of one taxpayer to a second taxpayer does not obligate the first taxpayer to reimburse the second taxpayer therefor. This contrasts with ss. 20(1)(j), 90(14), 227(6.1) and 247(13), which provide for the tax consequences of a reimbursement.

After noting that a community of condominium owners is treated by s. 1039 of the Civil Code as a legal person, and is a corporation, CRA went on to indicate that when such a syndicate sold one of the condominiums at a capital gain and distributed the gain to its members then, as such members were deemed by the definition of “shareholder” in s. 248(1) to be shareholders, such distribution would give rise to a shareholder benefit.

In a situation where there was personal use of a corporate aircraft by the individual shareholder (Mr. A) of the "grandfather" (indirect parent) of the corporate owner of the aircraft and by Mr. A's father (Mr. B), CRA concluded that the valuation of the benefits should be based on their fair market value (corresponding to “what price the shareholder would have had to pay, in similar circumstances, to get the same benefit from a company of which he was not a shareholder.”(at para 42)) rather than their cost – although, here, the denied operating expenses and CCA of the corporate owner "can be used to establish the value of the benefit conferred on Mr. A and Mr. B., to the extent that it can be demonstrated that this value approximates the FMV of the benefit received." (at para 77). A taxpayer submission, based on IT-160R3, that the benefits should be valued based on the prices of first class tickets for comparable trips, was not accepted. See summary under s. 246(1).

Q.1

: Is the s. 15(1) benefit arising from improvements made by the corporation to shareholder-owned commercial real estate mitigated if under the lease the corporation at lease end must be repaid by its shareholder for the value of the improvements? Q.2: If the shareholder transfers the property to a wholly-owned sub but with the lease term being extended, when is he required to include the s. 15(1) benefit in income?

Q.1

: After stating that its position in IT-432R2, para. 10 was consistent with the principle established in Kennedy and Ginter that "the amount of the benefit is based on the present value of the amount, if any, by which the addition or improvement increases the value of the property to the shareholder when it reverts to the shareholder," CRA stated:

If the shareholder reimburses the corporation for the value of the improvements as they are completed each year or at the end of the lease term, the extent to which the reimbursement would reduce the present value of the shareholder benefit under subsection 15(1) will depend on the relevant circumstances, including the conditions and provisions of the lease.

Q.2

: CRA indicated that if the shareholder had an income inclusion in the year the improvements were made, there would be no further inclusion on the subsequent transfer or lease extension.

A taxpayer renovates the basement of his home by adding a separate door, permitting access from the outside, in order to establish offices there of a wholly-owned corporation. The renovations are paid for by the corporation and the corporation pays rent to the taxpayer. Is there a shareholder benefit? CRA responded:

[T]he taxpayer remains the owner of the principal residence, so that if the renovations increase the value of that residence, a benefit could be conferred on the taxpayer as a shareholder since the corporation paid for the renovations.

Publico determined to grant stock options to its directors and consultants, as a result of which a private corporation ("Corporation"), that had provided consulting services, was entitled to receive a grant of options. However, such options instead were granted directly to Ms. X, the sole shareholder of Corporation, who subsequently exercised and sold the acquired Publico shares, reporting a capital gain.

After finding that s. 56(4) or 56(2) applied to Corporation, CRA noted that such income inclusion to Corporation did not detract from there also being a taxable benefit to Ms. X under s. 15 (or 6(1)(a), if it was received by virtue of employment - with a potential deduction to Corporation.)

In finding that the payment by a corporation of fees that had been incurred by its individual shareholder and that did not qualify in accordance with IT-454, para. 3 as pre-incorporation expenses, the Directorate stated:

The term "benefit" in subsection 15(1) is broad enough to include the following:

(a) a payment to a shareholder by a corporation other than by virtue of a true business transaction;
(b) the appropriation of capital or other property of a corporation in any manner whatsoever to a shareholder or to for the benefit of a shareholder;
(c) any other benefit that a corporation confers on a shareholder.

To the extent that the amount of fees paid by Corporation D must be included in computing Mr. B's income, we do not believe that such fees can be deducted by Corporation D in computing its income.

In…2011-0411491E5, CRA commented on an interest in a United States Limited Liability Corporation (LLC) held by an Alberta Unlimited Liability Corporation (AULC) owned by a Canadian resident individual. …[T]he individual would be subject to US taxation on…LLC income attributed to the AULC. CRA indicated that payment of these taxes on the individual's behalf would constitute a taxable benefit, either under S 15(1) if paid by AULC or under S 246(1) if paid by LLC. Can CRA explain the economic enrichment of the individual which it perceives to arise through the ownership structure? CRA responded:

[A]n amount paid by a corporation to its individual shareholder as a reimbursement of that shareholder's personal tax liability would result in an impoverishment of the corporation and an enrichment of the shareholder for purposes of subsection 15(1). A similar enrichment would result for purposes of subsection 246(1) where the shares are held by that individual indirectly through another corporation.

In response to a detailed submission to the contrary, CRA maintained its position under the expanded definition of "shareholder" in s. 248(1)

that members of a non-profit corporation without share capital will be considered shareholders thereof for purposes of subsection 15(1) of the Act, notwithstanding that they are not entitled to receive dividends.

Canco, a Canadian subsidiary of USCo, a publicly traded company, was required under Canadian GAAP to compute the fair value of stock options granted by USCo to Canco's employees (using the Black-Scholes method) and to recognize, in the year of grant, an expense equal to such fair value minus a deduction for unvested options forfeited in the year. Canco reimbursed USCo, apparently for this net amount, which it added back in computing its income under s. 7(3)(b). The amounts "T4'd" to Canco's employees were instead computed as the in-the-money option values when exercised.

In finding that the reimbursement payment did not give rise to a benefit to USCo under ss. 15(1) and 214(3)(a) (subject to there being no written recharge agreement), CRA stated:

[I]t would be reasonable for Canco to reimburse USCo an amount equal to the intrinsic value of the options on the day of exercise. However…it also is reasonable for Canco to reimburse USCo with an amount equal to the fair value of the options on the day of grant. We understand that in practice, both methods are used….

The Valuations Section...has advised us that the Black-Scholes options pricing model is an acceptable approach to use, assuming that it is adjusted for the differences inherent in employee stock options….

[I]f Canco does not have a history of reimbursing USCo, then we would take the view that there is no [unwritten] recharge agreement in place. If an agreement is subsequently entered into, we would consider that only the portion of the fair value of the options on grant date attributable to the vesting period after the new agreement is in place could be paid to the parent company without subsection 15(1) applying.

When asked whether there would be a taxable benefit where Corporation A, which had other insured employees as well, paid insurance premiums for life insurance policies and disability policies covering Mr. A, who was an employee, director and majority shareholder, CRA stated (TaxInterpretations translation):

Where a person who is at the same time a shareholder and employee receives a benefit which is not offered to other employees, the CRA presumes that the person has benefited therefrom qua shareholder. However, when a similar benefit is offered to all the employees including those who also are shareholders, the latter are considered to have received a benefit by virtue of their employment.

Under an agreement between a non-resident public company (Parentco) and its wholly-owned Canadian subsidiary (Canco), Canco reimburses Parentco for the fair value at the date of grant of share awards or stock options awards made by Parentco to Canco employees. Such fair value (as computed under IFRS-2) takes into account the fact that the rights to the shares or options have not yet vested on the date of grant.

Such reimbursements by Canco generally would not be considered to be benefits conferred on Parentco under s. 15(1), 214(3)(a) and 246(1)(b). However, upon audit, CRA may review the method used to compute the fair value of the awards.

Upon the incorporation of Opco, X subscribed for and continued thereafter to hold all the Class A voting participating shares of Opco, whose terms provide for a participating dividend. At that time or thereafter, a Holding company owned by X, or X’s spouse, subscribed a modest amount for Class B non-voting participating shares so that dividends thereon may accomplish a creditor-proofing or income-splitting objective.

CRA noted that it could consider that Opco had conferred a s. 15(1) benefit on the subscriber to the Class B shares if their fair market value was higher than the subscription price. “For example, we might reach this conclusion in a situation where the amount paid for the Class B shares did not represent the fair market value of the Class B shares at the time of subscription.” Alternatively, there might be circumstances (referred to in the summary as those where X rather than Opco had conferred the benefit) where CRA would apply s. 69(1)(b) and Kieboom on the basis that X had disposed of an interest in Opco to the Class B share subscriber. – which, in turn, could engage s. 74.1(1) where the subscriber was X’s spouse.

underline;">: RSU plan. Parent (which is a US public company) has for a number of years been issuing stock options and restricted stock units to employees of it and subsidiaries ("Participants"), including of the Company (an indirect Canadian subsidiary, which is held by another Canadian subsidiary: "Direct Shareholder"). Following the vesting of a Participant's RSUs, Parent issues shares to the Participant.

Proposed transactions

The Company commence reimbursing Parent for the market value of the shares issued to Participant employees of the Company in respect of RSUs that vest. In accordance with s. 7(3)(b), the Company will not deduct the payments.

Ruling

. No benefit will be considered to have been conferred by the Company on Parent or Direct Shareholder under s. 15(1) or 246(1) and no inclusion in Direct Shareholder's income under s. 56(2) of the Act, by reason of the reimbursements:

(i) in respect of RSUs that were awarded prior to XX and that were not vested at the Effective Time, to the extent of the increase in the value of the RSUs after XX; and

(ii) in respect of RSUs awarded on or after XX, all of the RSU value.

To the same extent, no Part XIII tax.

Mr. X holds 100 Class A voting participating shares of Opco with a fair market value of $5M and nominal adjusted cost base and paid-up capital. He incorporates Holdco whose shares have nominal fair market value, adjusted cost base and paid-up capital and exchanges his Class A shares of Opco for preferred shares of Opco with the same FMV, ACB and PUC as the exchanged Class A shares. Opco issues Mr. X 100 Class A shares for nominal consideration and also issues 100 discretionary dividend shares to Holdco. In order to limit the net asset value of Opco to $5M (i.e., for creditor-proofing purposes), Opco annually pays dividends of $500K on the discretionary shares held by Holdco.

CRA stated (TaxInterpretations translation):

We are of the view that subsection 15(1) could apply to the extent that Holdco acquired the discretionary dividend shares of Opco for consideration less than their FMV. Indeed, Opco could be considered to have conferred a benefit on Holdco under section 15(1) when the shares were issued.

Holdco, and its subsidiary Opco, enter into a split-dollar insurance arrangement. They "purchase together permanent life insurance policy on the life of the key man," and agree that they will jointly make the beneficiary designations on the policy so that Holdco will be the owner of the cash surrender value of the policy, and will be entitled to the death benefit attributable to the cash surrender value of the policy; and Opco will be entitled to the death benefit attributable to mortality gain and not that portion attributable to the cash surrender value of the policy. They further agree that each will fund that portion of premiums under the policy relating to that corporation's respective interest in the policy. CRA stated:

CRA has consistently expressed the view that where a life insurance policy is co-owned by a corporation and its shareholder (corporation or individual) pursuant to a split dollar arrangement or other shared ownership arrangement, there is a potential for the corporation to confer a benefit on that shareholder through the premium sharing arrangement. Where the premium paid by the shareholder is less than that which would be paid for comparable rights available in the market under a separate insurance policy, the corporation may be viewed as having conferred a benefit to the shareholder that could result in a shareholder's benefit for the purpose of subsection 15(1) of the Act.

Corporation A erected, at its expense and for exclusive use in its transport business, a detached garage on the land on which the principal residence of its individual shareholder (the “Taxpayer”) is located. The land subjacent to the garage is leased to it by the Taxpayer. After indicating that Corporation A would be entitled to claim capital cost allowance ("CCA") only if it held the right of superficies to the garage (i.e., by deed it was agreed that the Taxpayer would have no right of accession to the garage), CRA went on to indicate:

[I]n the event that the Taxpayer owns the garage, the garage construction costs are incurred by Corporation A and the application of subsection 15(2) cannot be clearly demonstrated by the parties, we are of the view that a taxable benefit could be conferred on the Taxpayer by Corporation A by virtue of subsection 15(1).

Professionals practising through a professional corporation hold a group term life insurance certificate as an insured, for which the policyholder is a professional association of which the insured is a member. They transfer the insurance certificate to their corporation so that it pays the premiums and receives the insurance proceeds on their death.

If the certificate continued to be issued in the name of the individual member of the professional association but the corporation paid the premiums and was designated as the beneficiary of the insurance proceeds, would there be a s.15(1) benefit? CRA responded:

It is possible that the transactions described in the question may be carried out for reasons other than business reasons, or in other words for personal reasons (including reducing the tax burden on individuals). It is possible that subsection 15(1) is applicable, depending on the facts.

What is the value of the benefit under s. 15(1) where a corporation changes the beneficiary of a life insurance policy on the life of its shareholder (Mr. A) from its subsidiary to the spouse of Mr. A, and Mr. A does not have more than a few months to live? CRA responded:

[D]epending on the circumstances, the CRA may consider the amount of premiums that would be payable if Shareholder A entered into a new life insurance policy at the time of the change in beneficiary, the fair market value of the insurance policy or the total amount that the insurer will pay by virtue of the policy.

Does a subsection 15(1) shareholder benefit result from the personal use and enjoyment of an airplane held by a single purpose corporation? CRA stated:

At Question 27 of the Round Table…at the 2008…APFF…Conference…CRA stated:

• When a single-purpose corporation owns a helicopter or another property which is used only for the personal purposes of the shareholder, the CRA will examine each situation on a case-by-case basis. It is possible, depending on the circumstances, that at a particular time, no benefit is conferred on a shareholder pursuant to the application of subsection 15(1) of the ITA, but such is not necessarily always the case.

CRA's response was consistent with the "imputed rent" method where the amount of the benefit determined under that method is nil because the shareholder personally finances the entire acquisition cost of a corporation's sole property and assumes all other expenses related to its use. Conversely…in document 2004-008679 about a luxury building…CRA indicated… that "if a luxury building was made available to a shareholder of a single-purpose corporation and this shareholder had financed 100% of the cost of acquiring the corporation's building through an interest free loan to the corporation and paid all the costs of operating the building, the shareholder could nonetheless be subject to a taxable benefit pursuant to subsection 15(1) I.T.A. if the fair market value of the building exceeds its acquisition cost."

S. 15(1) will not apply to a distribution of a share premium of a foreign affiliate if it is a pro rata distribution governed by draft s. 90(2).

Opco is the beneficiary of a universal life insurance policy (the "Policy") on the life of its sole shareholder, Mr. A, who is the policyholder. Opco pays the premiums on the Policy. A policy loan is made by the insurer to Mr. A. Is there a shareholder benefit?

CRA indicated that the payment of the premiums gave rise to s. 15(1) benefits, but not the advance of the policy loan.

In the case of a corporation to which s. 149(1)(l) applied (non-profit corporation for recreation or pleasure), use by a shareholder of corporate property, for less than fair market value of the use, might be a taxable benefit under s. 15(1). If so, then the value of the benefit is the difference between such fair market value and the consideration paid by the shareholder.

A mining exploration corporation (the "Purchaser") agreed with another mining exploration corporation (the "Vendor") to acquire an interest in the Vendor's unproven resource properties (the "Properties") in consideration for incurring specified exploration expenses. As part of this agreement, the Vendor also agreed to issue, for no significant consideration, warrants to the Purchaser to acquire treasury common shares.

The amount of the Canadian exploration expense otherwise considered to be incurred by the Purchaser was to be reduced by the value of the warrants. In commenting on such value, the Directorate stated:

In determining the portion of the total consideration for the warrants, we would consider the amount that would have been the benefit under subsection 15(1) if no consideration had been paid for the warrants. According to Interpretation Bulletin IT-96R6, that amount is the greater of the following amounts:

• the trading value of the rights received; and
• the amount by which the fair market value of the shares subject to the option at the time of the option's distribution exceeds the exercise price provided in the option.

Youngman, in addressing a shareholder’s personal use of the corporation’s luxury apartment (i.e., where it was difficult to use the "reasonable rent" method) stated that, in such a case, the method based on a return of capital (calculated on the greater of the cost or FMV of the property) plus the operating costs paid by the corporation should be used. In the context of current CRA tax audits, what criteria are used to determine the rate of return on capital used? CRA responded:

The "imputed rent" is determined by multiplying the greater of the cost or fair market value of the property by the "normal rate of return" and adding to this product the operating costs related to the property.

The "normal rate of return" is not necessarily the rate prescribed under ITR section 4300. …

The following are some elements that may be considered by the CRA in determining the "normal rate of return" in a particular situation:

• The rate of return that the corporation could earn on the capital invested to acquire the property made available to its shareholder;
• The rate of interest on a loan that the shareholder would have received from a person with whom the shareholder deals at arm's length if the shareholder had borrowed personally to acquire the property made available to the shareholder.

In general, the normal rate of return should be a market-determined rate.

Can works of art of a foreign artist that are listed personal property be held by a corporation without being subject to s. 15(1)? CRA responded:

[G]enerally, in situations where a painting by a foreign artist, acquired by a public corporation, is used exclusively to decorate a boardroom or office of a shareholder who is an employee of the public corporation, subsection 15(1) would not apply unless the corporation acquired the painting at the express request of the shareholder to decorate his or her office or boardroom.

The parent corporation is the beneficiary of a life insurance policy while its subsidiary is the policyholder and pays the premiums. Does s. 15(1) apply in this (or in the reverse situation)? CRA responded:

In general, the CRA considers that subsection 15(1) would be applicable where a transaction or series of transactions would result in the impoverishment of a corporation and an economic benefit to a shareholder [then quoting Del Grande].

In a situation where the subsidiary owns and pays the premiums for a life insurance policy of which the parent corporation is the beneficiary, the CRA is of the view that the subsidiary would have conferred a benefit on its shareholder, the parent corporation, by paying the premiums for the life insurance policy. Consequently, subsection 15(1) should apply so that the parent corporation has to include in computing its income the value of the benefit that the subsidiary would have conferred on it as income from property.

The above interpretation represents a change in position from …. 2004-006546 … and will apply as of calendar year 2010. …

[W]here a parent corporation pays the premiums for a life insurance policy that it owns and of which the subsidiary is a beneficiary, there is no benefit to the shareholder under subsection 15(1).

Where Subco is the owner and pays the premiums on a life insurance policy, and the sole shareholder of Subco (Parentco) is the beneficiary, Subco will be considered to be conferring a benefit on Parentco by paying the premiums, so that Parentco would be required to include a benefit in its income.

Where the parents of the shareholder of a farming corporation have the exclusive use of a residence owned by the corporation at no charge, is a s. 15(1) benefit conferred on either the shareholder or the parents? In finding that there was a benefit on the shareholder, CRA stated:

[I]t … follows among other things from subsection 15(5) that subsection 15(1) can apply where a corporation makes property available to a person related to a shareholder.

In the context of a private corporation … the CRA would presume prima facie that the sole shareholder is the directing mind of the corporation's operations.

In order for the taxpayers (the children) to fund their obligation to pay support to the divorced wife (Mrs. X) of their deceased father with funds in their corporation (Childco), Childco will subscribe for non-voting and non-participating preferred shares in the amount of Newco for $1,000,000, with Newco using those funds to purchase a non-prescribed life annuity, combined with a life insurance policy on the life of Mrs. X. Newco will receive the annuity and pay taxes on the taxable portion thereof; and also pay the cost of insurance and pay a taxable dividend to Mrs. X. It is agreed that upon the death of Mrs. X, the proceeds of the policy on Mrs. X's life will be used by Newco to redeem the preferred shares of its capital stock held by Childco.

Does s. 15(1) apply to the children? CRA indicated that s. 15(1) could apply “if Childco were found to be impoverished by the transactions” and that “the value of the benefit could be the amount that the children would have to pay, in similar circumstances, to obtain the same benefit from a person dealing at arm's length with them that results from the particular situation.”

A and B, who are the two 50% shareholders of AB Inc., also are the two salaried managers of AB Inc. All other employees are non-managers. It is proposed that A and B, will enter into individual salary insurance policies providing for the payment of benefits in the event of incapacity for work due to illness or accident, with AB Inc. paying the premiums and treating it as a group plan.

CRA indicated that it considered that “the premium paid by AB Inc. for the benefit of A and B constitutes a benefit received by them in their capacity as shareholders,” so that the benefit from such payment was not excluded by s. 6(1)(a)(i).

The only significant asset of FA2 is a loan receivable of $100 owing by its parent, FA1, which is a wholly-owned foreign affiliate of Canco. When the $100 debt is extinguished for less than its principal amount on a winding-up of FA2 into FA1, fapi is realized by FA1 by virtue of ss.15(1) and (1.2) assuming that FA2 does not actually carry on a business and given that the benefit conferred by FA2 on FA1 is a direct result of the settlement of the $100 note and not of the redemption or cancellation of the shares of FA2 on its dissolution. To the extent of the inclusion under s. 15(1), there would be a corresponding reduction in any "forgiven amount" for s. 80 purposes (provided that the $100 note was not considered to have been used by FA1 for a business use as a result of the application of s. 95(2)(a)(ii)(D)).

A not-for-profit condominium syndicate, which CRA found was a corporation, proposed to distribute its land to the members in order to benefit from a lower municipal tax rate. CRA found that the distribution would give rise to a taxable benefit under s. 15(1). It stated:

[A]s defined in subsection 248(1), a shareholder includes, inter alia, a member. In our view, co-owners of a syndicate are members of the syndicate and shareholders for purposes of the Act.

CRA has indicated that where a corporation transfers an interest in a life insurance policy of which it is the owner to an individual who is its sole shareholder, there will be a s. 15(1) benefit equal to the excess of the fair market value of the interest in the life insurance policy over the consideration paid. What about a situation where an individual is the sole shareholder of two corporations and an interest in a life insurance policy is disposed of by one of the corporations to the other?

CRA responded:

[I]t is possible that the transferor corporation may be impoverished as a result of the transaction described above. In such a case, to the extent that it is shown that, under the terms of the transaction, the transferor corporation confers a benefit on the sole shareholder, subsection 15(1) would apply to require the individual to include in income the value of the benefit conferred.

A home or cottage is held by a trust with Mr. X and his family as well as a corporation owned by his spouse, as beneficiaries. If that property is made available to the corporation’s shareholder, will the shareholder be required to include a taxable benefit in her income?

CRA indicated that this turned on whether (i) the trust specifically granted a right to use the property to the corporation, with such newly-created property then being distributed for not consideration by the corporation its shareholder without consideration, or (ii) the trust allowed the shareholder to use the property held by the trust. In the second case, there would be no benefit under s. 15(1), and also no benefit under s. 105(1) given that the shareholder was related to a beneficiary – whereas, in the first case, there could be a s. 15(1) benefit conferred by the corporation.

The Directorate indicated that Holdco did not confer a benefit pursuant to s. 15(1) on its sole shareholder (Mr. X) by acquiring a deferred annuity contract with a cash surrender value under which Mr. X is the annuitant, where Holdco is the owner and beneficiary of the contract.

In finding that the payment by a corporation of the expenses (tuition, accommodation and travel) for Bob, its sole employee and sole shareholder, to attend an executive MBA (EMBA) program did not give rise to a taxable benefit under s. 15(1) or 6(1)(a), CRA stated:

[T]he EMBA program is indirectly related to the corporation's business and will provide Bob with the necessary skills and abilities that will enable the corporation to develop new business opportunities. ...

It is not uncommon today for employers to pay the costs of training their employees for programs such as the EMBA. We therefore believe that section 15 should not apply in this case since the payment of tuition fees represents a bona fide business transaction. With respect to subsection 6(1) - the provision governing employee benefits - we also exclude its application for the same reasons.

A corporation acquires a universal life insurance policy on the life of its shareholder, with the amount of the insurance coverage and the cash surrender value being payable to it as the beneficiary. The shareholder obtains a personal line of credit from a financial institution, secured by a pledge of the cash surrender value of the policy. The interest on the loan is not paid but rather capitalized at the same rate as the increase in cash surrender value. On the death of the shareholder, the amount of the insurance coverage is paid to the corporation and the cash surrender value is paid to the financial institution to repay the shareholder's line of credit and the accumulated interest. In finding that this arrangement might very well give rise to a taxable benefit under s. 15(1) (and after indicating that it might also engage GAAR), CRA stated:

[A] benefit pursuant to subsection 15(1) or 246(1) could exist in the above situation. … [T]he Agency [has] stated that a benefit could result from the use of a corporate asset as security for a personal loan and that position remains valid. … [T]he benefit could be the difference between the interest rate on the loan with the security and the interest rate on a loan without the security. Another way of establishing the value of the benefit would be to determine what the shareholder would have had to pay to a third party to obtain such a guarantee. In addition, the repayment of the line of credit with the proceeds of the cash surrender value following the death of the shareholder could constitute a benefit under subsection 15(1) or 246(1).

After indicating that the acquisition by a shareholder of an interest in a corporate life insurance policy for less than the fair market value (FMV) of that interest would engage s. 15(1) to the extent of the excess of the FMV of the interest in the life insurance policy over the consideration paid, CRA stated:

The FMV of an interest in a life insurance policy is not generally equivalent to its cash surrender value. The age and health of the insured, the value of the accumulation fund, the cash surrender value and the amount of premiums paid at the date of transfer are all factors to be considered in determining the FMV.

An estate freeze entailed the exchange by Mr. A of his common shares of Opco by way of purchase for cancellation for Class A preferred shares with a redemption value of $1 million, followed by a common share subscription by his two adult children for nominal consideration. The exchange agreement contained a price-adjustment clause providing that in the event of a CRA challenge to the FMV of the Class A preferred shares received by Mr. A as consideration, Mr. A and Opco would agree to exchange the those Class A preferred shares for an equal number of Class B preferred shares.

After noting that in such a situation “it is not subsection 15(1) that the CRA would consider applying if the FMV of the freeze preferred shares was less than the FMV of the exchanged common shares, but rather subsection 51(2).”

A corporation that pays premiums to a wage loss replacement plan for a shareholder/employee. CCRA indicated that this would give rise to a taxable benefit equal to the amount of such contributions. Regarding whether such benefit could be reduced if the shareholder reimbursed the corporation, CCRA stated “it is not possible to reduce a shareholder benefit pursuant to subsection 15(1) by requiring the shareholder/employee to repay the value of the benefit conferred” and, in its summary, added that “[t]he Act does not provide a mechanism to reduce such a benefit by repaying the value of the benefit … .”

A great-grandchild foreign subsidiary ("Dco") of a Canadian public corporation ("Aco") and a great-grandchild foreign subsidiary of Aco ("Fco") held through another chain of corporations each hold ownership interest ("quota") in another foreign affiliate of Aco ("Eco"). The two quota holders of Eco agree that the principal assets of Eco will be assigned to a newly-incorporated corporation in the same foreign jurisdiction ("Jco") for no consideration; but that contemporaneously with the creation of Jco and the assignment of property of Eco to Jco, the capital account and retained earnings of Eco will be reduced and added to the capital and retained earnings of Jco (which is owned by Dco and Fco in the same proportions as they owned, and continue to own, Eco).

Ss.15(1), 56(2) and 246(1) do not apply.

A corporation purchases a critical illness insurance policy on the life of its sole shareholder and there is also, at an additional cost, a rider to the policy providing for a refund of the premiums paid if the shareholder does not develop one of the covered illnesses or medical conditions after a 10-year period.

(1) The corporation pays the annual premium for the critical illness policy and pays the premiums for the premium refund amount and is the beneficiary of the critical illness benefit and the premium refund amount, (2) the same except that the shareholder is the beneficiary of the premium refund amount, or (3) the corporation pays the annual premium for, and is the beneficiary of the critical illness policy, and the shareholder pays the premiums for, and is the beneficiary of, the premium refund amount.

After noting “that the payment of the premiums by the corporation would not generally result in a benefit to a taxable shareholder pursuant to subsection 15(1)” and that, conversely, “if the shareholder is the recipient of the benefit or refund of premiums under the policy, the payment of the premiums by the corporation will constitute a [taxable shareholder] benefit,” CRA then stated:

The same is true in a situation where the corporation pays the premiums for critical illness insurance and the shareholder pays the premiums for the premium return amount, if the corporation is impoverished as a result of these transactions. The value of the benefit could be the amount that the shareholder would have to pay, in similar circumstances, to obtain from a person dealing at arm's length with the shareholder, the same benefit that arises from the relevant transaction.

OPCO, which was the policyholder and holder of an insurance policy on the life of its sole shareholder (A), whose wife (B) was the beneficiary, paid the annual premiums on the policy,

The Directorate indicated that the taxable benefit arose as and in the amount of the premiums that were so paid, and that the payment of the DEATH benefit to B under the policy did not give rise to a s. 15(1) benefit. The Directorate further indicated that Audit should consider reassessing beyond the normal reassessment period based on s. 152(4)(a)(i).

Opco was the policyholder and beneficiary of a life insurance policy on the life of the individual controlling it, and Opco paid the paid the policy premiums, which it did not deduct in computing its income. The Directorate stated:

[I]n light of the fact that Holdco is the policyholder, holder and beneficiary of A's life insurance policy, the payment of premiums by Holdco in respect of that policy should generally not be considered to be a benefit conferred by Holdco on A that would be described in subsection 15(1).

CRA rejected the apparent proposition put to it that there was no shareholder benefit where a corporation in the residential construction business sold two semi-detached homes for their cost plus a gross margin to its two respective shareholders, stating that whether there was the conferral of a benefit turned on whether the sale price equaled the homes FMV.

A broker was sued for his alleged mismanagement of the portfolios of a holding corporation, its principal shareholder and his RRSP under a combined suit of the corporation and the shareholder (the latter also claiming for his RRSP). Regarding the corporation paying the legal fees for all the plaintiffs (as to which it was represented that the corporation would have incurred the same fees had it sued alone only for its account), CCRA stated:

[T]he payment of all of these costs by the corporation confers an advantage on the principal shareholder and the RRSP if they do not repay their share to the company. … [T]he fees paid by the corporation for the principal shareholder should be included in the principal shareholder's income pursuant to subsection 15(1). In addition, we would consider applying subsection 246(1) to include in the income of the principal shareholder the fees paid in respect of the principal shareholder's RRSP.

To avoid the application of subsection 15(1) and subsection 246(1), the legal and appraisal costs should be allocated on a reasonable basis between the corporation, the principal shareholder and the RRSP.

For the first nine years of a critical illness policy on the life of one of its shareholders, the corporation has been paying the premiums on the policy. As a result of the payment of an additional premium, the policyholder (the corporation) is entitled to a return of premiums on the policy maturity after 10 years. In the 10th year, the corporation assigns the insurance policy without consideration to the shareholder, who pays the premium due for the 10th year and then receives a full refund of all premiums paid during the term of the policy.

What are the tax consequences of transferring the policy? CCRA responded:

It is the CCRA's view that subsection 148(7) does not apply to the transfer of a critical illness policy that is an accident or sickness policy. However, a shareholder who acquires such a policy from the shareholder’s corporation for less than fair market value will be required by virtue of subsection 15(1) to include in computing income an amount equal to the excess of the fair market value of the critical illness policy over the consideration paid.

In determining the fair market value of such a policy, we are of the view that the age and health of the insured, the amount of refundable premiums and the amount of premiums paid at the date of transfer will be among the factors to consider.

A CCPC is the policyholder of a critical illness policy respecting its sole shareholder where either the shareholder is the beneficiary of the benefit, or the benefit is payable to the policyholder.

CCRA indicated that in both cases, the premiums paid by the corporation would not be deductible to it by virtue of ss. 18(1)(a) and/or (b), and that there would be a taxable s. 15(1) benefit to the shareholder from such payment of premiums in the second situation, but not the first.

In Scenario 1, a private corporation acquires (and becomes the policyholder of) a permanent life insurance policy on the life of one of its shareholders, pays the premiums on the policy for 12 years, then transfers the policy without consideration to the shareholder who, two years later, after having taken over the premium payments, cancels the policy.

Alternatively (in Scenario 2) a private corporation acquires a critical illness policy on the life of one of its shareholders with a term of 10 years, with the corporation choosing the "return of premium" option at maturity which, for a higher premium, provides a full refund of all premiums if no claim has been made. In the 10^th year, it transfers the policy to the shareholder without consideration who, after paying the premiums for one year, receives a full refund of all premiums paid during the policy term.

CCRA indicated that in both scenarios the amount of the benefit to be included in computing the shareholder's income pursuant to s. 15 (1) equaled the excess of the policy’s FMV over any consideration paid. Regarding the life insurance policy, it stated that “[t]he age and health of the insured, the value of the accumulation fund, the cash surrender value and the amount of premiums paid at the date of transfer are all factors to be considered in determining the FMV.”

The corporation built a luxury house on land belonging to its shareholder for his exclusive benefit and use and to his specifications, with its cost exceeding its FMV at completion. After the construction, the corporation allowed its shareholder and his family to use the house exclusively for personal purposes. Subsequently, it transferred the house to its shareholder in a sale made at FMV.

In finding that there was a taxable benefit equaling the loss realized on such sale, the Directorate noted that if the shareholder “had built the house himself, he would have had to bear the full cost of construction, despite the FMV of the house being less than its cost of construction when completed.” This finding was supported by Seeley v. M.N.R., 59 D.T.C. 283.

In a second file entailing the sale of farmland by a corporation to a shareholder at a loss, such loss was attributable to the farm being unsuccessful and the only personal element was that the shareholder had made an unsuccessful application to convert a small portion of the land to residential use. There was no s. 15(1) benefit.

A corporation is the owner and policyholder of an individual life insurance policy on the life of an employee or shareholder and names the employee's or shareholder's estate as beneficiary. The beneficiaries of the life insurance policy are revocable. The employee or shareholder has no rights of any kind in the policy. The corporation pays the premium for this life insurance policy.

In finding that the payment of the premiums would give rise to a taxable benefit under s. 6(1)(a) or s. 15(1), as applicable, CCRA stated:

The payment of an insurance premium provides protection against the risk during the period covered by the premium. Even if the risk does not occur during that period, there is a benefit in obtaining this protection or coverage. … [T]he coverage of the risk during the period covered by the premium will benefit the employee (or shareholder) if the employee's (or shareholder's) beneficiaries are the beneficiaries of the life insurance policy during that period. We are also of the view that this benefit can generally be measured by the amount of the premium charged for the period.

A and B, who were the equal common shareholders of Opco, each had personal holding companies (Holdco A and B) form an equally owned holding company (Portfolioco), which subscribed a nominal amount for newly-created Class K non-voting discretionary-dividend shares of Opco. Thereafter, dividends corresponding to the surplus cash accumulated in Opco were paid annually on the Class K shares, and distributed in turn by Portfolioco to the two Holdcos.

Regarding the potential application of s. 15(1), CCRA stated:

[I]f Portfolioco were to acquire the Class K shares of Opco for less than the fair market value of such shares, it could be considered that Opco conferred on Portfolioco a benefit described in subsection 15(1) upon the issuance of such shares.

… [A] taxpayer does not necessarily have to have an overall economic benefit or an increase in net worth for subsection 15(1) to be applicable in a particular situation. Thus …any decrease in the fair market value of the Class A shares of the capital stock of Opco should not be taken into account in determining the value of the benefit that would be conferred on Portfolioco … . [citing inter alia Perrault and Vine Estate]

Respecting the situation where an interest-bearing debt owing by one wholly-owned subsidiary to another wholly-owned subsidiary is exchanged for non-interest bearing debt with a term of two years, CCRA commented: "Generally, where a debtor corporation is in financial difficulty such as in the situation you described, it is our view that the conversion of an interest-bearing intercorporate loan to a non-interest-bearing intercorporate loan would generally not result in the application of subsections 15(1), 56(2) or 56(4) of the Act to the parent corporation provided the new debt has the same principal amount as the old debt, the corporate shareholder receiving the funds is or will be in a position to repay the loan or to provide reasonable security for repayment, and the loan is bona fide."

Respecting the question as to the consequences of a corporation that had carried on business for 16 years without issuing any shares then issuing one share, the Directorate indicated that, subject to an appropriate court rectification order being obtained, "the issue of a share of a corporation for a nominal amount at a time when the fair market value of that share is greater than a nominal amount will generally be considered to have resulted in a benefit being conferred on the purchaser of share, even if that purchaser is the first subscriber ... ."

Discussion of whether s. 15(1) or 56(2) might apply to a loan to a sister corporation.

In response to a question as to whether expenses incurred in response to a takeover bid or sale would give rise to a shareholder benefit when incurred by a public corporation, the Agency stated that:

"The question of whether corporate-paid expenses constitute a shareholder's benefit under subsection 15(1) depends on whether the expenses were incurred primarily for the benefit of the shareholders, which is a question of fact to be determined on a case-by-case basis."

S.56(2) would not normally be considered.

Regarding a life insurance policy pledged by the taxpayer’s corporation to borrow from a bank a series of amounts to be repaid only after the taxpayer’s death from the proceeds of the policy, CCRA stated that it was “of the view that a benefit may result from the use of an asset of a corporation to secure a personal loan.”

A Canadian controlled private corporation ("Parent") and its U.K. subsidiary ("U.K. Sub") agree that UK Sub will pay to Parent an amount equal to the stock option benefits enjoyed by U.K. Sub's employees on the exercise of options to acquire shares of Parent. This amount is not included in Parent's income under s. 15(1) or 12(1)(x).

Respecting the CCRA position on single purpose corporations, it stated that "where each shareholder did not contribute their pro-rata share of the funds required to acquire the particular U.S. residential property (either by equity or non-interest bearing loan), the corporation would not qualify as a single purpose corporation. In addition, there is a requirement that "the corporation that acquired the particular U.S. residential property ... do so with funds provided solely by the shareholder(s) and not by virtue of the shareholder's holdings in that corporation or those of a related person and any other corporation".

Where a subsidiary reimburses its parent for the difference between the fair market value of shares of the parent company on the date of exercise of options on the shares of the parent previously granted to employees of the subsidiary, and the amount paid to the parent company by the employees who acquire the shares, there will be no inclusion in the income of the parent under ss.15(1), 12(1)(x) or 90 for the amount of the payment, provided that the payment is in respect of options granted after the arrangement was in place, or was in respect of the increase in the stock option benefit that, in the circumstances, may reasonably be considered to have arisen after the arrangement went into effect on options that were granted prior to the arrangement.

A company aircraft of the majority shareholder ("Mr. X") of a Canadian-controlled private corporation was used to fly Mr. X, his family and several business associates to a ski lodge in Western Canada where they went heli-skiing. After finding tht deductibility of the expenses was denied by s.18(1)(l), CRA stated:

IT-160R3 provides guidance on this situation in paragraphs 9 to 11. The benefit to a shareholder-employee is generally considered to be derived in his or her capacity as shareholder and is taxable as a shareholder's benefit under subsection 15(1) if:

• (a) the shareholder-employee controls the corporation or is one of a related group that controls the corporation or any affiliated corporation, and
• (b) there is extensive use of the aircraft for personal purposes by the shareholder-employee or, because of the latter's position, by relatives or friends of the shareholder-employee.

What constitutes "extensive use", for purposes of paragraphs 9 and 10 of IT-160R3, depends on the facts and circumstances in each case. As a general guideline, personal use amounting to one-third of the total flying time will be regarded as "extensive."

Waiver of dividends on exchangeable shares did not result in the application of benefit provisions.

Canadian employees of a Canadian subsidiary of a foreign parent had "subscription rights" to acquire unlisted ordinary shares of the foreign parent. The subscription rights plan provided that at the same time the employee was granted a right she would acquire a non-interest bearing bond of the parent at an appropriate discount, and enter into put and agreements with a non-resident corporation ("Putcallco") under which the employee could cause Putcallco to acquire the employee's foreign parent shares at their fair market value at the time of exercise of the rights acquisition (as determined under a formula), and Putcallco could acquire those shares at their fair market value in the event the individual ceased to be an employee. The foreign parent and the Canadian subsidiary had agreed that when a subscription right was exercised by an employee, the Canadian subsidiary would be obliged to pay to the foreign parent the amount by which the fair market value of the shares acquired by the employee exceeded the exercise price.

The granting by the Canadian subsidiary to the employees of the right to surrender their subscription rights to it for a cash amount equal to the difference between the fair market value of a foreign parent share (determined on the same formula basis) and the exercise price would not result in a disposition under s. 7(1)(b) or result in a conferral of a benefit by the Canadian subsidiary on the foreign parent under s. 15(1).

Ruling that s. 15(1) would not apply to a waiver of dividends on exchangeable shares.

Where a U.S. subsidiary guarantees debts of its Canadian parent without charging a guarantee fee, a benefit under s. 15(1) may apply. Where s. 15(1) so applies, it is considered to be a more specific provision that s. 247(2), so that no amount would be deemed to be paid or credited pursuant to s. 214(15)(a) and, consequently, no Part XIII tax would be exigible.

An interest-free loan made by a controlled foreign affiliate (that was not resident in a designated treaty country) to its indirect wholly-owning Canadian parent did not give rise to an imputed benefit under s. 15(1) to the parent.

Where shares bearing a non-cumulative dividend of 10% are exchanged on an s. 86 reorganization for shares bearing a non-cumulative dividend of 15%, the shareholder with the increased dividend rate will be considered to have received an s. 15 benefit, and other shareholders may be considered to have received fair market value proceeds under s. 69(1)(b).

Where special shares of a wholly-owned subsidiary are converted into a nominal number of common shares of the subsidiary having a fair market value substantially less than the fair market value of the special shares before the conversion, RC generally will not consider applying s. 15(1).

Where a corporation gives a remainder interest in ecologically sensitive property to a heritage or conservation organization and retains a life interest pur autre vie (on the joint lives of its shareholders and their children), a benefit under s. 15(1) or 56(2) would be considered to have been conferred by it.

s. 15(1)(c) did not apply to a rights offering where the majority shareholder of the corporation agreed to purchase any of the rights not purchased by the other shareholders pursuant to the first stage or second stage of subscription pursuant to the rights offering.

The Department's administrative concession respecting the holding of a U.S. residential property by a corporation only applies where all seven conditions stipulated by the Department are satisfied. Accordingly, the administrative concession is not available with respect to Canadian real estate. In any event, the Department is reconsidering the policy in light of the proposed Protocol to the Canada-U.S. Convention.

"The Donovan decision would appear to support the position that to the extent any imputed interest reduces the amount of a benefit under subsection 15(1), it should be included in the shareholder's income under paragraph 12(1)(c) ..."

The positions set out in three technical interpretations (28 March 1991 - 910235; 8 November 1991 - 912013; and 5 November 1991 - 912999) respecting dividend reinvestment plans and stock option plans still represent the Department's practice.

A court order directing a corporation to pay a "dividend" to an inactive shareholder in order to compensate him for the undue depletion of the corporation's equity caused by excessive management fees paid to the other shareholders in previous years would not give rise to a dividend unless the payment "represented a dividend duly declared by the Board of Directors to be payable on a pro rata basis to the owners of the shares of a particular class of stock". To the extent the payment in question was not salary, a dividend or a reduction in paid-up capital, it would be included in income under s. 15(1).

Where a taxpayer has transferred property to a corporation pursuant to s. 85(1) and has received consideration in excess of the fair market value of the property transferred, s. 85(2.1) in its amended form will apply before subsection 84(1). Accordingly, to the extent that the excess consideration exceeds the paid-up capital of the shares received by the taxpayer on the transfer, such amount will no longer be taxed as a deemed dividend but will be taxed as a shareholder benefit under s. 15(1).

The Department's administrative position respecting "single purpose corporations" only applies to a Canadian corporation that holds U.S. real property on behalf of its shareholders, and does not apply to a U.S. corporation holding a yacht on behalf of its direct or indirect Canadian individual shareholder.

If the shareholder has provided interest-free loans to the corporation in order to finance the acquisition of the property, RC is not prepared to extend a benefit offset as was done on a different set of facts in the Youngman case (90 DTC 6322).

In a situation where a corporation made improvements to a property owned by its shareholder, RC discusses the quantification of the resulting benefit to the shareholder, notes that it is immaterial whether the corporation intended to confer a benefit on the shareholder, and notes that if the improvements could realistically be removed and re-used, there might not be a benefit on the authority of the Ginter case (77 DTC 5274).

Where a corporation makes a charitable donation on behalf of a deceased shareholder, there will be a shareholder benefit which (on the assumption that the estate was obligated to make the donation before it distributed property to the beneficiaries) would be included in the income of the estate rather than the beneficiary.

Where a loan is received by an employee of a corporation who owns all its shares, RC will consider that the loan was not contracted qua employee, except under exceptional circumstances.

There could be a taxable benefit where the corporation guarantees a bank loan made to an employee or a shareholder.

The unreasonable portion of salaries or bonuses paid to non-resident shareholder-managers will be subject to Part XIII tax under ss.15(1), 214(3)(a) and 212(2).

RC's policy on single-purpose corporations will cease to apply where the corporation disposes of the property notwithstanding that it realizes a capital gain on the disposition.

The non-resident shareholders of a non-resident corporation which allows them to use a Canadian vacation property rent-free will be imputed a benefit under ss.15(1) and 214(3)(a).

S.15(1) will not generally apply to impute an interest benefit on a non-interest bearing note owing by a parent to its subsidiary since interest on shareholder debt is imputed under s. 80.4(2), which does not apply in respect of indebtedness owing by a corporate shareholder resident in Canada.

Where a Canadian subsidiary guarantees a loan obtained by its U.S. parent from the U.S. bank, the Canadian subsidiary is performing a service to its U.S. parent the value of which is a taxable benefit under s. 15(1), notwithstanding that there might be no benefit under s. 15(1) if the U.S. parent had instead pledged the shares of the Canadian subsidiary as security for the loan.

S.15(1) will not be applied to shares issued under a dividend reinvestment plan for at least 95% of their fair market value (based on an average market price over a short period such as five days).

Where each holder of common shares of a corporation is given the right to purchase a unit consisting of a common share and a warrant to purchase another common share, both the right and the warrant are rights described in s. 15(1)(c).

Where an individual controls two corporations both carrying on business in Canada and in the course of those businesses one corporation makes a bona fide loan to the other, there is no shareholder benefit even if the loan does not bear interest. The forgiveness of the loan due to the failure of the business of the borrower also will not cause s. 15(1) (or s. 56(2)) to apply.

Where a property provided by a corporation to its shareholder is so expensive or luxurious that there is no normal rental market, the taxable benefit will be calculated by adding all maintenance costs incurred by the corporation and a return on the greater of the cost or fair market value of the property computed at the interest rate prescribed for purposes of s. 80.4, and deducting any amounts paid by the shareholder to the corporation.

A shareholder of a corporation who directs the corporation to make a loan to another corporation which is not in a position to repay the loan or provide reasonable security may, depending on the circumstances, have received a taxable benefit if he had an interest in the borrower corporation.

RC will not apply its favourable assessing policy regarding single-purpose corporations holding personal-use properties if the corporation disposes of the personal use property and acquires another property.

Where an individual resident in the U.S. charges an excessive rent for the rental of a building owned by him to an indirect Canadian subsidiary, RC will generally not apply ss.15(1), 56(2), 214(3) and 246(1) to the individual or the immediate U.S. parent of the Canadian subsidiary where the benefit has been included in the income of the non-resident individual and has been subject to tax in Canada.

RC is prepared to consider requests for advance income tax rulings where some shareholders are excluded from participation in a dividend reinvestment plan of a public corporation. However, Revenue Canada should not be favourably inclined where the plan includes terms which may result in the acquisition of shares by the public corporation in the open market for the purpose of being resold to shareholders at a lower price.

Where the taxpayer, who holds all the preference shares of a holding company which in turn holds all the shares of Opco arranges to borrow money and lend it directly to Opco at no interest, there will be no conferral of a benefit on the holders of the common shares of Holdco (his children).

The policy on single-purpose corporations does not apply where adult children have incorporated and funded their own corporation to purchase a vacation property owned by their father's corporation on condition that he be granted the right to free access and use of the property during his lifetime. The children's corporation, by granting rent-free use of the property to someone other than its own shareholders, would not meet the first RC condition.

S.15(1)(c) applies where a corporation confers on all owners of common shares the right to buy a unit consisting of a common share and a common share purchase warrant.

Listing of the six conditions with respect to a single-purpose corporation holding U.S. real estate.

S.15(1)(c) will not apply where residents of Quebec are excluded from a rights offering in order to avoid having to comply with the requirements of Quebec law that the offering material be in French. However, the position in IT-116R2, para. 2 will be applicable.

The administrative position respecting U.S. condominiums does not apply to other properties, in this case, airplanes.

S.15(1) will not generally apply in respect of intercorporate loans made between two sister corporations and, in general, RC does not require that loans between resident corporations bear interest. However, s. 15(1) would be applicable in circumstances similar to those in the Vine Estate case.

It would not be practical for RC to extend its administrative practice in IT-169 respecting price adjustment clauses to adjust for values finally determined by the courts.

Where a Canadian public company confers on all its common shareholders a right to buy units consisting of shares, and warrants to acquire shares of the corporation, both the "right" and the "warrant" would be considered a right to buy additional shares referred to in s. 15(1)(c). If for some reason s. 15(1)(c) did not apply, then the shareholder would be considered to have received a taxable benefit at the time entitlement to the unit of shares and warrants arose.

An interest-free loan made between two non-profit organizations which are corporations could give rise to an s. 15 benefit in the hands of the shareholders of the recipient corporation.

Discussion of when a benefit is conferred on a shareholder by virtue of his participation in a universal life insurance policy.

With respect to two of the four conditions respecting the holding of U.S. residential property by a corporation: the rent-free use of the property by persons other than the shareholder may indicate that the corporation is not a single purpose corporation; and it does not make any difference if the shareholder pays operating expenses directly or if the shareholder funds the corporation which uses the funds to pay the ongoing expenses.

With respect to the fourth condition for single-purpose corporations holding U.S. residential property, it is intended that the corporation be "a mere conduit, the only 'asset' of which would be the personal-use property, and that all expenses would be directly and immediately passed through to the shareholder". Accordingly, it is inappropriate for the shareholder to provide funds to the corporation in advance.

Unacceptable departures from the 1980 Round Table position include: the advancing of funds to the corporation by someone other than the shareholder; the holding of the real estate by a U.S. corporation whose shares are held directly by a Canadian taxpayer; the holding of the real estate by a U.S. corporation whose shares are held by a Canadian corporation; the earning of any rental revenue; the holding of more than one property; the transfer of the property to the corporation on a s. 85(1) roll. However, the holding of the shares of the corporation by two spouses in joint tenancy is acceptable.