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March 2, 2024

Tax Tips

Single Purpose Corporations - New Proposals
Subject: Shareholder Benefits, US Estate Tax
Number: 04-31
Date: 12/3/2004
CRA has issued a new administrative policy on single purpose corporations that own US property.

In the Tax Tip (04-17) dated July 9, 2004, we discussed the CRA's proposals with regard to Single Purpose Corporations. This Tax Tip was based on the Income Tax Technical News Number 31 dated June 23, 2004. The CRA then withdrew that announcement and stated that they would come up with additional comments. On November 24, 2004, CRA discussed this issue in Income Tax Technical News No. 31R.

The CRA's premise is similar to the previous announcement wherein they stated that there is no longer a need for a Single Purpose Corporation because of previous changes to the Canada-U.S. Tax Treaty. It was CRA's previous position that there would be no shareholder benefit to shareholders of Single Purpose Corporations even though a corporation was holding a personal asset. The CRA is now stating that there will be a shareholder benefit where a property is acquired after January 1, 2005 by a Single Purpose Corporation or where a person acquires shares of the Single Purpose Corporation unless that acquisition is a result of the death of the individual's spouse or common-law partner. In other words, Single Purpose Corporations are no longer acceptable in new situations commencing January 1, 2005.

However, the old administrative policy will continue to apply to those arrangements that are currently in place until the earlier of:

the disposition of the U.S. property owned by the Single Purpose Corporation; or

the disposition of the shares of the Single Purpose Corporation other than the transfer of the shares to the shareholder's spouse or common-law partner as a result of the death of the shareholder.

The CRA has stated that the 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. In order to clarify the situation, the CRA has stated that a dwelling is considered to be "under construction" where the foundation or other support has been put in place. There is no transitional relief where vacant land has been acquired but the foundation or other support has not been put in place. The CRA also states that 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 that building and construct a new dwelling on the land.

For those individuals who were considering doing construction on vacant land, it might be a good idea to commence that construction before December 31, 2004 if the land is owned in a Single Purpose Corporation. From January 1, 2005, there is no longer a strong reason to use a Single Purpose Corporation as there will be negative Canadian income tax implications and there may not be U.S. estate tax protection. In the future, consideration should be given to using a trust to own U.S. property.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.