- Single Purpose Corporations (Loans)

Single Purpose Corporations

Subject: Loans
Number: 04-17
Date: 7/9/2004

CRA has changed its administrative position for companies owning U.S. real estate.

In a recent Technical News, No. 31, the CRA has changed its policy on Single Purpose Corporations. In the past, the government allowed a single purpose corporation to own U.S.-based property in order to limit the exposure to U.S. estate taxes.

The CRA believes that the changes to the Canada-U.S. Tax Treaty, with regard to the allowing of any estate taxes paid as a credit against any Canadian capital gain taxes, have removed the need for Canadians to have the single purpose corporations.

The effect of this is that there could be taxable benefits under subsection 15(1) for any personal use property held by a Canadian corporation.

This means that effective June 23, 2004, the administrative relief will no longer apply to:

property acquired by a single purpose corporation; or

persons who acquire shares of a single purpose corporation unless the acquisition is the result of the death of the individual's spouse or common-law partner.

As a transitional measure, the administrative relief will continue to apply for current single purpose corporations 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 a single purpose corporation other than a transfer between spouses or as a result of the death of a shareholder.

A single purpose corporation no longer appears to be the best vehicle to own U.S. real estate. As discussed in previous Tax Tips, there can be double tax exposure or higher tax exposure in those situations where a single purpose corporation disposes of the U.S. real estate. The optimal structure at this point appears to be the use of a trust to own the U.S. real estate.

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