Single-Purpose Corporations
The Canada Revenue Agency has recently completed the review of its administrative position not to assess a taxable benefit under subsection 15(1) of the Income Tax Act (the “Act”) where the taxpayer is the shareholder of a single-purpose corporation that has been established to hold U.S.-based real property.
This position was first described in response to Question 20 at the Revenue Canada Round Table of the 1980 Canadian Tax Foundation Conference and has been subject to additional clarification on several occasions. The rationale for this position arose out of the fact that when Canada abolished estate taxes in 1972, it terminated its estate tax convention with the U.S. such that Canadian residents who owned U.S.-based property were significantly limited in the relief they could obtain from U.S. estate taxes exigible on their U.S. holdings. This lack of relief was not considered appropriate given that Canada did not levy an estate tax on U.S. residents.
These U.S. estate tax problems that confronted Canadian residents owning personal-use real property situated in the United States were generally resolved by the amendments to the Canada-United States Income Tax Convention (the “Convention”) that came into effect on November 9, 1995. The provisions relating to U.S. estate taxes can be found in Article XXIX B of the Convention. Since the rationale for the administrative position is no longer valid, it is inappropriate to continue this administrative policy.
Consequently, subject to the transitional relief described below,2 effective after December 31, 20042, this administrative policy will no longer apply for:
- any new2 property acquired by a single-purpose corporation, or
- a person who acquires shares of a single-purpose corporation unless such share acquisition is the result of the death of the individual’s spouse or common-law partner.
The administrative policy will continue to apply to those arrangements that are currently in place until the earlier of:
- the disposition of the particular U.S.-based real estate by the single-purpose corporation; or
- a disposition of the shares of the single-purpose corporation, other than a transfer of such shares to the shareholder’s spouse or common-law partner as a result of the death of the shareholder.
In addition, this administrative policy will continue to apply to any renovation or addition to a dwelling which was acquired before January 1, 2005, and to a dwelling which was under construction on December 31, 2004. For greater certainty, a dwelling will be considered to be under construction where the foundation or other support has been put in place. Transitional relief will not be provided where vacant land has been acquired but the foundation or other support has not been put in place. Similarly, transitional relief will not be provided where land with an existing building has been acquired before January 1, 2005 but it is the intention of the taxpayer to demolish the existing building and construct a new dwelling on the land.