2023-0965831C6 STEP 2023 – Q10 - Non-Resident Corporations Owning Canadian Real Estate

Principal Issues: 1.How would any taxable benefit relating to the use of the property be computed? 2. To whom is the taxable benefit assessed and what is the nature? 3. Is it subject to non-resident withholding tax?

Position: 1. The amount of the benefit to a shareholder (taxpayer) is the amount that the shareholder would have to pay, in similar circumstances, to get the same benefit from a corporation in which the taxpayer is not a shareholder. 2. The non-resident shareholder is deemed to receive a dividend from a corporation resident in Canada. 3. Yes.

Reasons: Interpretation of the Act and previous positions.

Author: Chan, Michael
Section: 15(1), 15(1.4)(c), 15(7), 212(1)(d), 212(2), 212(13)(a), 214(3)(a), 246(1).

2023 STEP CRA Roundtable – June 20, 2023
QUESTION 10. Non-Resident Corporations Owning Canadian Real Estate

A non-resident of Canada wishes to purchase real estate in Canada for personal use (a vacation home). In determining how to purchase the real estate, for reasons having nothing to do with Canadian tax, the non-resident decides to use a non-resident corporation of which the non-resident is a shareholder.

Assume that the vacation home is available for use by the non-resident shareholder or the shareholder’s family members during the year. Assume further that the family members (i) are not shareholders of the corporation; and (ii) do not deal at arm’s length with the non-resident shareholder.

In these circumstances, assuming that no rent is paid to the corporation for the use of the vacation home, how would any taxable benefit relating to the use of the property be computed? To whom is the taxable benefit assessed and what is the nature? Is it subject to non-resident withholding tax?

CRA Response

The CRA’s view remains that subsection 15(1) of the Act (footnote 1) applies when a non-resident corporation confers a benefit in the form of making available to its non-resident shareholder or to an individual that does not deal at arm’s length with the non-resident shareholder (such as their family members) a property located in Canada.

Subsection 15(7) confirms that subsection 15(1) applies in computing the income of a shareholder of a corporation for purposes of Part I, whether or not the corporation was resident in Canada or carried on business in Canada. Paragraph 15(1.4)(c) provides that for the purposes of subsection 15(1), a benefit conferred by a corporation on an individual is a benefit conferred on a shareholder of the corporation if the individual does not deal at arm’s length with the shareholder.

The amount or value of a benefit conferred on the non-resident shareholder by the non-resident corporation that would have to be included in computing the income of the shareholder pursuant to subsection 15(1) if Part I of the Act were applicable will be deemed, pursuant to paragraph 214(3)(a), to be a dividend paid to the non-resident shareholder by a corporation resident in Canada. Consequently, this deemed dividend will be subject to Part XIII withholding tax pursuant to subsection 212(2) but the rate may be reduced under the applicable tax treaty.

The fact that the property in question is acquired by the corporation for reasons not related to Canadian tax would not be relevant to the calculation of the amount of the benefit.

The CRA’s general position on the calculation of the shareholder benefit from the personal use of corporate property is described in paragraph 11 of Interpretation Bulletin IT - 432R2, Benefits Conferred on Shareholders (Archived), which states in part:

The calculation of the amount or value of the benefit is usually based on the fair market rent for the property minus any consideration paid to the corporation by the shareholder for the use of the property. The fair market rent may not, however, always be appropriate for measuring the benefit, particularly where it does not provide for a reasonable return on the value or cost of the property.

The amount or value of the benefit is generally equal to the price that the shareholder (taxpayer) would have to pay, in similar circumstances, to get the same benefit from a corporation in which the taxpayer is not a shareholder.

In cases where the fair market value rent does not provide a reasonable return on the value of the property or is not otherwise appropriate to measure the benefit, the amount of the benefit is to be determined using the imputed rent approach. See, in this respect, Youngman v. Canada [1990] F.C.J. No. 341, Fingold v. Canada [1997] F.C.J. No. 1250 and ARPEG Holdings Ltd. v. Canada, 2008 FCA 31. The determination of the appropriate method to be used and its application depend on the specific circumstances of every case.

In general terms, the imputed rent approach determines the amount or value of the shareholder benefit by multiplying what would generally be a normal rate of return for the non-resident corporation by the greater of the cost or fair market value of the property and by adding the operating costs (other than interest paid on liabilities connected with the property). Any consideration paid to the corporation by the non-resident shareholder or by the individual that does not deal at arm’s length with the non-resident shareholder for the use of the property is deducted from the imputed rent.

It should be noted that an interest-free loan by the shareholder to the corporation that is used by the corporation to fund the acquisition of the property may be deducted from the amount on which the rate of return is applied.

It is the responsibility of the non-resident corporation to determine the method that is most appropriate based on the relevant facts and to withhold and remit to the Receiver General any tax that may be payable under Part XIII of the Act based on the value or amount of the benefit so determined.

Michael Chan
2023-096583

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The Act means the Income Tax Act R.S.C. 1985, c.1 (5th Supp.) as amended from time to time and consolidated to the date of this response and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

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