Tax Tip[] Loans

Single Purpose Corporations

“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.


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.

Loans To Family Members

“Certain conditions are necessary to claim capital losses on loans to family members..”

There have been a few recent cases which clarify that lending money to family members at no interest will mean that the lender cannot claim a capital loss if that loan becomes un-collectable. In one recent case of Curtis (2004 DTC 2445), the taxpayer mortgaged his home to lend funds to his son. The son used those funds to purchase a restaurant franchise. The son had made the taxpayers mortgage payments until the taxpayer’s son became bankrupt. Once the taxpayer’s son became bankrupt, the taxpayer himself started to repay his mortgage. The taxpayer claimed a capital loss on the mortgage repayments that he had to make. The son’s payments were the same amount as the taxpayer’s mortgage payment. In other words, there was no additional income to be earned by the taxpayer.

In order for a loss to be a capital loss, the property itself must be capital property in the first place. This means that property must be a property from which income can be earned. On a loan, income can generally be earned in one of two ways:

  • Interest income on the loan;
  • Dividends to be received as a shareholder of the company to whom the loan was made.

It is a common situation for a wife to lend funds to her husband in order for the husband to invest in a business or for the wife to lend funds directly into the husband’s business. If there is no interest charged and if the wife is not a shareholder then there is no way for the wife to earn income from the loan and therefore any loss on that loan is not a capital loss.

In the Curtis case, the judge determined that the loan was simply a family loan and there was no way for the father to earn any income on his loan. This case is interesting because there was an interest portion in that the total amount that had to be repaid to the bank had a principal and an interest portion. However, the judge was very clear that the father cannot make any money on this as the amounts coming in were the same as the amounts going out.

It is very important to emphasize that where loans between family members are not interest bearing, there is no tax write off available. It is prudent to charge a business rate of interest in order to have the ability to write that loan off in the future.


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.