Principal Issues: An individual ("Father") owns all of the issued and outstanding shares of the capital stock of a corporation ("Corporation A"). The son of Father ("Son") owns all of the issued and outstanding shares of the capital stock of another corporation ("Corporation B"). Corporation A would like to invest its excess cash in Corporation B. This could be done by subscribing to redeemable and retractable preferred shares of the capital stock of Corporation B, or by making an interest-free loan to Corporation B. Whether subsection 246(1) would apply in the given fact situation?
Position: No. Assuming that Son and Corporation B would not have an interest in Corporation A (for example, Son and Corporation B are not, and are not contemplating becoming, shareholders of Corporation A) and would not have any business relationship with Corporation A, one of the conditions of subsection 246(1) would not be met (that is, the inclusion in the taxpayer's income of the amount of the benefit if such amount had been a payment made directly by the person to the taxpayer). However, other provisions of the Act could apply, depending of the facts and circumstances pertaining to the given situation. For example, subsection 56(2) would technically be applicable if it is possible to establish that a payment or transfer of property would be made by Corporation A, pursuant to the direction or with the concurrence of Father, as a benefit that Father desired to have conferred on Corporation B, and if the payment or transfer would be included in computing Father's income if the said payment or transfer had been made to Father (for example, under subsection 15(1) in the circumstances). If subsection 56(2) were applicable, the payment or transfer would be included in the Father's income. However, case law has established that subsection 56(2) will not generally be applicable in a situation involving a bona fide loan. However, where it is apparent at the time the loan is made that the corporation receiving the funds will not be in a position to repay the loan or to provide reasonable security for repayment, the shareholder who has directed the payment may be considered to have deliberately and permanently removed value from the corporation. Consequently, in such circumstances, subsection 56(2) may apply. Furthermore, if a loan is forgiven in a particular situation, the advance of funds may become a "payment or transfer" of property subject to subsection 56(2) at the time of the forgiveness of the said loan. Finally, to our knowledge, no court has specifically dealt with the application of subsection 56(2) in a situation involving a subscription of shares.
Reasons: Wording of the Act and previous positions.