NO.: IT-432R2
DATE: February 10, 1995
SUBJECT: INCOME TAX ACT
Benefits Conferred on Shareholders
REFERENCE: Subsection 15(1) (also sections 84 and 246; subsections 15(1.1) to
15(1.4), 15(7), 52(1), 52(1.1), 56(2) and 248(1) definitions of "property",
"corporation", "shareholder" and "specified shareholder"; paragraphs 6(1)(a),
69(1)(b), 82(1)(a) and 214(3)(a); and subparagraph 129(1)(a)(i) of the Income
Tax Act; and subsections 20(1) and 26(5) of the Income Tax Application Rules,
1971 (ITAR)
Application
This bulletin cancels and replaces IT-432R dated June 19, 1985.
Summary
This bulletin discusses the taxation of shareholder benefits. Subject to
specific exceptions, the amount or value of any benefit conferred by a
corporation on a shareholder is included in the shareholder's income under
subsection 15(1). A number of the more common situations in which such a
benefit can arise are discussed. The shareholder benefit provision can also
apply to a person who, at the time the benefit was conferred, was contemplated
as becoming a shareholder.
The bulletin also discusses provisions that relate to a corporation's payment
of a stock dividend, the forgiveness of a shareholder's obligation to a
corporation, the goods and services tax component of a shareholder benefit,
non-resident shareholder benefits, and other related provisions.
Discussion and Interpretation
Subsection 15(1)
Paragraph 1. Under subsection 15(1), the amount or value of a benefit
conferred on a shareholder by a corporation in a taxation year is included in
the shareholder's income for the year, except to the extent that the benefit
is deemed by section 84 to be a dividend. A benefit conferred by a corporation
can also be included under subsection 15(1) in the income of a person who at
the time the benefit was conferred was not a shareholder, if it was
contemplated that the person would become a shareholder. Accordingly, the
references throughout the rest of this bulletin to a "shareholder" include a
"contemplated shareholder", where applicable. The word "benefit" in subsection
15(1) is broad enough to include
(a) a payment by a corporation to a shareholder otherwise than pursuant to a
bonafide business transaction;
(b) an appropriation of a corporation's funds or other property in any manner
whatever to, or for the benefit of, a shareholder; or
(c) any other benefit or advantage conferred on a shareholder by a
corporation.
If the person on whom the benefit has been conferred is both a shareholder and
an employee of the corporation, a determination will have to be made, taking
into consideration all the relevant facts and circumstances of the particular
case, as to whether the benefit was conferred by the corporation on the person
as a shareholder or as an employee. In the latter case, paragraph 6(1)(a) of
the Act applies, rather than subsection 15(1).
Paragraph 2. A shareholder benefit cannot be included in income under
subsection 15(1) if it falls within any of the exceptions described in
paragraphs 15(1)(a) to (d). Thus, no amount is to be included in a
shareholder's income under subsection 15(1) for any benefit occurring
(a) on the reduction of a corporation's paid-up capital (paragraph 15(1)(a));
(b) on the redemption, cancellation or acquisition by a corporation of its
shares (paragraph 15(1)(a));
(c) on the winding-up, discontinuance or reorganization of a corporation's
business (paragraph 15(1)(a));
(d) on the winding-up of a Canadian corporation or dissolution of a controlled
foreign affiliate to which section 88 applies (paragraph 15(1)(a)); or
(e) on the payment of a dividend or stock dividend (paragraph 15(1)(b); see,
however, the rule discussed in 19 below).
Under the exception in paragraph 15(1)(c), no amount is to be included in a
common shareholder's income under subsection 15(1) for any benefit resulting
from a corporation's conferring on the shareholder a right to acquire an
additional share or shares (common or otherwise) of the corporation, as long
as the identical right is given to every other common shareholder for every
common share owned by that other common shareholder. For purposes of the
paragraph 15(1)(c) exception, that paragraph further provides two rules, the
effects of which are as follows:
- Different classes of common shares are considered identical property where
different voting rights are attached to each class but there are no other
differences in their terms and conditions that could cause a material
difference between the fair market values of shares of the different classes.
This rule enables a corporation with voting and non-voting common shares to
confer on shareholders of each class a right to acquire additional shares of
that class without a subsection 15(1) benefit arising (i.e., if all the
conditions for the paragraph 15(1)(c) exception are otherwise met).
- Rights are not considered identical if the cost of acquiring the rights
differs.
Under the exception in paragraph 15(1)(d), no amount is to be included in a
shareholder's income under subsection 15(1) for any benefit arising when an
insurance corporation, bank or other corporation converts contributed surplus
into paid-up capital in an action described in paragraph 84(1)(c.1), (c.2) or
(c.3). Benefits resulting from transactions referred to in the above-mentioned
exceptions to subsection 15(1) are in some cases taxed under other provisions.
Paragraph 3. The words "shareholder" and "corporation" are defined in
subsection 248(1). The "taxation year" referred to in subsections 15(1) and
15(1.1) (see 19 below) is the taxation year of the shareholder and not that of
the corporation.
Paragraph 4. Generally, when "property", as defined in subsection 248(1), is
transferred by a corporation to or on behalf of a shareholder for inadequate
consideration or no consideration, a benefit will have been conferred on the
shareholder under subsection 15(1) unless one or more of the specific
exceptions described in 2 above apply.
Bona Fide Transactions
Paragraph 5. If a transaction involving a corporation and a shareholder is a
bona fide business transaction, there is no subsection 15(1) benefit to the
shareholder. Normally, a transaction is considered to be bona fide when its
terms and conditions are essentially the same as they would be if the
transaction were entered into by parties dealing at arm's length.
Exchange of Property
Paragraph 6. In an exchange of property between a corporation and a
shareholder, whether by sale or otherwise, if the value of the property
transferred by the corporation is more than the value of the property received
by it from the shareholder, there is an appropriation of property for the
benefit of the shareholder. The amount to be included in the shareholder's
income under subsection 15(1) is the amount by which the fair market value, at
the time of the exchange, of all the property transferred by the corporation
exceeds the fair market value, at that same time, of all property received by
the corporation, to the extent that the excess is not deemed to be a dividend
by virtue of subsection 84(1).
Shareholder's Transfer of Assets to a Corporation for Its Shares
Paragraph 7. A shareholder may sell or otherwise transfer assets to a
corporation in a transaction in which the consideration received by the
shareholder consists of or includes shares in the capital stock of the
corporation. If the paid-up capital of the shares issued by the corporation
exceeds the value of its net asset increase (if any), subsection 84(1)
generally deems the amount of such excess to be a dividend received by all
persons owning shares of the particular class and in proportion to their
shareholdings. (A subsection 84(1) deemed dividend can occur where a
subsection 85(1) election is made in connection with the transaction, although
the effect, if any, of subsection 85(2.1) should be considered). In addition,
if the fair market value of the consideration exceeds the fair market value of
the assets sold or transferred, any such excess amount, except to the extent
that it has been included in the shareholder's income under subsection 84(1),
is generally included in the shareholder's income under subsection 15(1). The
following example provides an illustration:
Assumptions: A taxpayer owns one third of the common shares in a corporation
and is unrelated to and at arm's length with the corporation and the other
shareholders. The taxpayer transfers land worth $5,000 to the corporation for
consideration consisting of newly created preferred shares in the corporation
and cash of $6,000. The preferred shares issued to the taxpayer have a paid-up
capital of $1,000 and a fair market value, as of the date of the transaction,
of $1,500. No subsection 85(1) election is made in connection with the
transaction.
Results: The taxpayer is assessed a subsection 84(1) deemed dividend and a
subsection 15(1) income amount as follows:
Subsection 84(1) deemed dividend:
Increase in paid-up capital $1,000
Minus: Net asset increase to the corporation, if any ($5,000 minus $6,000)
XXXX
Subsection 84(1) deemed dividend $1,000
Subsection 15(1) income amount:
Fair market value of non-share consideration $6,000
Fair market value of shares issued ($6,000 + $1,500) = $7,500
Minus:
Fair market value of assets transferred to the corporation $5,000
Subsection 84(1) deemed dividend ($5,000 + $1,000) = $6,000
Subsection 15(1) income amount ($7,500 minus $6,000) = $1,500
Theft or Embezzlement by a Shareholder
Paragraph 8. Subsection 15(1) can apply even if the action or transaction
involved is unauthorized, dishonest or illegal. The word "benefit" used in the
subsection has a meaning wide enough to include, for example, funds or
property of a corporation stolen or embezzled by a shareholder. However, as
indicated in 1 above, the application of subsection 15(1) requires not only
that there be a benefit to the shareholder but also that the benefit be
conferred on the shareholder by the corporation. Where the shareholder and the
corporation are not dealing at arm's length, the Department assumes that any
appropriation or diversion of funds or property of the corporation to the
shareholder would be with the concurrence of, and therefore would result in a
benefit conferred by, the corporation. Where, on the other hand, the
shareholder and corporation are dealing at arm's length, any theft or
embezzlement of funds or property of the corporation by the shareholder would
normally be without the concurrence of the corporation, in which case there
would be no benefit conferred by the corporation (this could happen, for
example, where the shareholder is a minority shareholder). Where a subsection
15(1) benefit does not occur, a theft or embezzlement is generally taxable in
accordance with the rules discussed in the current version of IT-256, Gains
from Theft, Defalcation or Embezzlement.
Acquisition of Shares - Consideration Given by Corporation
Paragraph 9. Where a shareholder acquires the shares of another shareholder in
a particular corporation, the circumstances surrounding the transaction may
result in a subsection 15(1) benefit being conferred on the shareholder
acquiring the shares. For example, the corporation may undertake to pay
consulting fees or to make other payments for future services to the
shareholder disposing of the shares (the ex-shareholder). If such payments by
the corporation are in fact consideration for the shares sold, a benefit is
considered to have been conferred on the shareholder acquiring the shares in
the year in which the corporation made the commitment to make the payments.
There would be an indication that such an undertaking or commitment by the
corporation is in fact consideration for the shares where the payments to the
ex-shareholder must be made whether or not services are rendered to the
corporation by the ex-shareholder.
Addition or Improvement to Shareholder's Building
Paragraph 10. A corporation that is renting a building owned by a shareholder
may make an addition or improvement to the building. If such an addition or
improvement vests in the owner of the building, a benefit is considered to
have been conferred on the shareholder by the corporation pursuant to
subsection 15(1). The amount of the benefit is considered to be the present
value of the amount, if any, by which the addition or improvement increases
the value of the building to the shareholder at the time the building reverts
to the shareholder. Therefore, in determining the amount of the benefit it is
necessary to consider the particular facts of each case. The facts to be
considered include the nature of the addition or improvement, the term of the
lease, provisions for extension of the lease, provisions of the lease
regarding leasehold improvements, and the amount of rent being charged. The
benefit considered to be conferred in a particular taxation year is based upon
the portion of the addition or improvement completed during that year. If the
terms of the lease are later altered in favour of the shareholder, or if the
lease is annulled before its term expires, a benefit would be created at that
time equal to the increase in the shareholder's reversionary interest created
by the alteration or cancellation of the lease.
Personal Use of Corporate Property by a Shareholder
Paragraph 11. If corporate property is made available for the personal use of
a shareholder, a benefit under subsection 15(1) is generally considered to
have been conferred on the shareholder. This is so whether or not the
shareholder has contributed to the cost of the property or has paid any
related operating expenses. Also, the fact that the corporation has not
claimed any capital cost allowance on the property is not relevant. 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. This may be the case, for example, for a luxury residence or yacht
made available for the shareholder's personal use. See Lloyd Youngman v. The
Queen, 90 DTC 6322, (1990) 2 C.T.C. 10. If the fair market rent is not an
appropriate measure, or if it does not exist or cannot be determined, the
amount or value of the benefit would then usually be determined by multiplying
a normal rate of return times the greater of the cost or fair market value of
the property and adding the operating costs related to the property. The total
of these two amounts is often referred to as the "imputed rent".
Any consideration paid to the corporation by the shareholder for the use of
the property is then subtracted from the imputed rent. In applying this
formula, the amount representing the greater of the cost or 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 (in circumstances that are
essentially the same as in the Youngman case) to enable the corporation to
acquire the property, before multiplying by the normal rate of return.
Cost of Property Acquired by Shareholders
Paragraph 12. Where an amount is included in the income of a resident
shareholder pursuant to subsection 15(1) as a consequence of the acquisition
of a capital property from a corporation, subsection 52(1) provides that such
an amount is an addition to the cost to the shareholder of the property
(except to the extent that such amount has otherwise been added to the cost or
included in the adjusted cost base of the property). Subsection 52(1.1)
contains a similar rule for a non-resident shareholder where the property
acquired would, on disposition by the shareholder, be classed as taxable
Canadian property. Since the rules in subsections 52(1) and 52(1.1) are only
for the purpose of calculating capital gains or capital losses, they are not
applicable where the property acquired by the shareholder is inventory or
eligible capital property, nor do they affect the amount of capital cost for
the purposes of capital cost allowances. Also, they do not apply where
subsections 20(1) or 26(5) of ITAR applies to the transaction.
Paragraph 13. Where a corporation disposes of property to a shareholder at
less than fair market value and paragraph 69(1)(b) applies to deem the
corporation to have received proceeds of disposition equal to that fair market
value, the Department may permit a corresponding adjustment to the
shareholder's purchase price (e.g., in circumstances involving an honest error
or a price adjustment clause). For more information, see the current version
of IT-405, Inadequate Considerations - Acquisitions and Dispositions, and,
where applicable, the current version of IT-169, Price Adjustment Clauses. If
the Department does permit such an adjustment to the purchase price and the
shareholder thus ends up paying the full fair market value (determined as of
the date of the purchase) to the corporation for the property, there is no
subsection 15(1) benefit to the shareholder.
No Deduction Allowed to the Corporation
Paragraph 14. If an amount is included in the income of a shareholder under
subsection 15(1), such amount is not allowed to the corporation as a deduction
from income.
Non-resident Corporation
Paragraph 15. Subsection 15(7) confirms that subsection 15(1) applies to a
resident shareholder of a non-resident corporation whether or not the
corporation was resident in Canada or carried on business in Canada.
Benefits Resulting from Personal Use of Aircraft, the Availability of an
Automobile or from an Interest-free or Low-interest Loan
Paragraph 16. For comments on shareholder benefits resulting from
- the personal use of aircraft,
- the availability of an automobile, or
- an interest-free or low-interest loan,
please see the current version of IT-160, Personal Use of Aircraft, IT-63,
Benefits, Including Standby Charge for an Automobile, from the Personal Use of
a Motor Vehicle Supplied by an Employer, or IT-421, Benefits to Individuals,
Corporations and Shareholders from Loans or Debt, respectively.
Related Provisions
Paragraph 17. The rules in subsection 15(1) are supplemented by, and should be
read in conjunction with, the provisions in subsection 56(2) and subsections
246(1) and (2) in so far as they relate to indirect payments or transfers made
by a corporation for the benefit of a shareholder or as a benefit that the
shareholder desired to have conferred on some other person. Subsection 56(2)
is discussed in the current version of IT-335, Indirect Payments.
Co-operative Apartments
Paragraph 18. A number of individuals may form a corporation for the sole
purpose of having the corporation own an apartment block. Each shareholder
becomes entitled to occupy a specific suite in the apartment block. Generally,
monthly service rates charged by the corporation to the shareholders are
calculated so as to defray as nearly as possible the estimated cost of
financing and operating the building. The intention of this arrangement is
that the corporation does not have a profit or loss and the shareholders
receive accommodation at actual cost. In these circumstances, while the
shareholders are charged less by the corporation than the fair market rent,
subsection 15(1) is not considered to apply to the shareholders nor is
paragraph 69(1)(b) considered to apply to the corporation. The foregoing view
will not be taken if the corporation accumulates surplus funds and the income
earned on those funds is used to pay part of the operating costs of the
building.
Stock Dividends
Paragraph 19. As indicated in 2(e) above, subsection 15(1) cannot apply to any
benefit resulting from a corporation's payment of a stock dividend. However,
if it may reasonably be considered that one of the purposes of the payment of
the stock dividend was to significantly alter the value of the interest in the
corporation of any specified shareholder of the corporation (e.g., to shift
from one person to another the capital gain on a subsequent sale of shares),
subsection 15(1.1) applies. Under that subsection, the fair market value of
the stock dividend is included in the recipient shareholder's income except to
the extent that it has otherwise been included in the shareholder's income as
a taxable dividend under paragraph 82(1)(a). The term "specified shareholder"
is defined in subsection 248(1).
Obligations Settled or Extinguished
Paragraph 20. When a subsection 15(1) benefit is conferred on a shareholder by
a corporation in connection with a loan or other obligation of the shareholder
that is settled or extinguished without any payment or by payment by the
shareholder of less than the amount of the obligation outstanding, subsection
15(1.2) applies. For the purposes of subsection 15(1), the value of the
benefit is deemed by subsection 15(1.2) to be the amount by which the
obligation outstanding at the time it is settled or extinguished exceeds the
total of the following two amounts:
(a) the amount, if any, of the benefit in respect of the obligation that was
included in the income of the shareholder when the obligation arose, and
(b) the amount, if any, paid by the shareholder on settlement.
Note: On December 20, 1994, the Minister of Finance released draft legislation
on the income tax consequences of debt forgiveness and foreclosures. This
legislation relates to measures announced in the Federal Budget of February
22, 1994. If enacted, the legislation would, among other things, do the
following:
- Subsection 15(1.2) would be amended to provide that the value of a
subsection 15(1) shareholder benefit in connection with an "obligation issued
by a debtor" that is settled or extinguished at any time would be deemed to be
the "forgiven amount" at that time in respect of the obligation.
- The "forgiven amount" for purposes of amended subsection 15(1.2) would be
defined in new subsection 15(1.21). This definition would parallel the
definition of "forgiven amount" in amended subsection 80(1), subject to
certain modifications.
- New subsection 248(26) would clarify that a debtor's liability to repay
borrowed money or to pay an amount (other than interest)
- as consideration for any property acquired by the debtor or services
rendered to the debtor, or
- that is deductible in computing the debtor's income
would be considered to be an "obligation issued by the debtor". This rule
would apply for purposes of applying the provisions of the Act (including
amended subsection 15(1.2) and new subsection 15(1.21)) relating to the
treatment of a debtor in respect of a liability. New subsection 248(27) would
clarify the treatment of an obligation issued by a debtor that is or was part
of a larger obligation issued by the debtor.
- An order would be created for applying certain provisions in the Act that
pertain to debt, including amended subsection 15(1.2) and new subsection
15(1.21).
These amendments would generally apply to taxation years ending after February
21, 1994.
Goods and Services Tax
Paragraph 21. Subsection 15(1.3) provides that, to the extent that the amount
or value of a subsection 15(1) benefit is determined by reference to the cost
to a corporation of any property or service, such cost to the corporation
shall not include any Goods and Services Tax ("GST") payable by the
corporation on that property or service.
Paragraph 22. Subsection 15(1.4) generally requires that an amount be included
in a shareholder's income which essentially represents the amount (if any) of
GST that the shareholder would have paid had the shareholder purchased in the
marketplace a property or service which results in a subsection 15(1) benefit
or would have resulted in such a benefit had no payments been made to the
corporation or to a person related to the corporation.
Deemed Dividend to a Non-resident
Paragraph 23. For resident shareholders, amounts brought into income by virtue
of section 15 are classified as income from property. For non-resident
shareholders, paragraph 214(3)(a) deems such amounts to be a dividend to which
the normal non-resident tax rules under Part XIII apply. Paragraph 214(3)(a)
is for the purposes of Part XIII only. Consequently, the deemed dividend does
not qualify as a dividend paid by the corporation for dividend refund purposes
under subparagraph 129(1)(a)(i).
Explanation of Changes
Introduction
The purpose of the Explanation of Changes is to give the reasons for the
revisions to an interpretation bulletin. It outlines revisions that we have
made as a result of changes to the law, as well as changes reflecting new or
revised departmental interpretations.
Overview
This bulletin discusses the taxation of benefits conferred by a corporation on
a shareholder or contemplated shareholder. It has been revised primarily to
reflect relevant amendments and proposed amendments to the shareholder benefit
provision and related provisions.
Legislative and Other Changes
New paragraphs 1 and 2 replace old paragraphs 1, 2 and 9. New paragraphs 1 and
2 reflect the amendments to subsection 15(1) that have resulted from the
enactment of Bills C-139 and C-18 (these amendments took effect in 1988) as
well as Bills C-92 and C-27 (these amendments took effect for benefits
conferred after December 19, 1991).
New paragraph 3 is essentially the same as old paragraph 6 except that a
reference has been added to paragraph 15(1.1), which became law by the
enactment of Bill C-84 in 1986.
The following new paragraphs are essentially the same as the corresponding old
paragraphs:
New paragraph 4 Old paragraph 11
New paragraph 5 Old paragraph 10
New paragraph 6 Old paragraph 14
New paragraph 7 Old paragraph 3
New paragraph 9 Old paragraph 19
New paragraph 10 Old paragraph 17
New paragraph 12 Old paragraph 12
New paragraph 13 Old paragraph 13
New paragraph 14 Old paragraph 8
New paragraph 15 Old paragraph 5
New paragraph 16 Old paragraph 16
New paragraph 18 Old paragraph 20
New paragraph 23 Old paragraph 4
New paragraph 8 replaces old paragraph 15. New No 8 reflects the provisions of
subsection 15(1), as amended in 1988 by the enactment of Bill C-139.
New paragraph 11 is added to the bulletin. It is based on the Department's
answer to question 33 of the 1987 Canadian Tax Foundation Round Table
Discussion as well as on the Federal Court of Appeal's decision in Lloyd
Youngman v. The Queen, 90 DTC 6322, (1990) 2 C.T.C. 10.
In new paragraph 17, which replaces old paragraph 7,
- the reference to old subsection 245(2) and (3), as they read prior to the
enactment of Bill C-139 in 1988, has been removed, and
- a reference has instead been made to subsections 246(1) and (2), which were
added to the Act by the enactment of Bill C-139.
New paragraph 19 has been added to the bulletin to discuss the rule contained
in subsection 15(1.1), which was added to the Act by the enactment of Bill C-
84 in 1986.
New paragraph 20 has been added to the bulletin to discuss the rule contained
in subsection 15(1.2), which was added to the Act by the enactment of Bill C-
64 in 1987. An italicized note at the end of paragraph 20 describes amendments
to the Act, proposed in draft legislation released by the Minister of Finance
on December 20, 1994, that relate to the application of subsection 15(1.2).
New paragraphs 21 and 22 have been added to the bulletin to refer to
subsections 15(1.3) and 15(1.4). Both subsections were added to the Act by the
enactment of the GST legislation, effective for benefits conferred after 1990.
22 reflects the amendments to subsection 15(1.4) that resulted from the
enactment of Bill C-92, the last of which took effect for the 1992 taxation
year.
Old paragraph 18 is removed from the bulletin because the first part of that
paragraph is outside the scope of a discussion on shareholder benefits and the
second part is already covered by the comments in new paragraph 12.
Throughout the new bulletin, there are other changes or additions to the text
which we have made solely to clarify or elaborate on the information given,
without changing the substance of what was said in the old bulletin.
Link to Source: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/it432r2/it432r2-e.txt