15 August 2012 External T.I. 2012-0442521E5 - Shareholder Loans

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Where an amount is loaned to a shareholder in January 2011 and is repayable to the corporation in five equal payments per year commencing December 31, 2011, and the corporation has a December 31 year-end, how much of the loan must be included in the shareholder’s income under 15(2) for the 2011 taxation year.

Position: The shareholder would have one year from December 31, 2011 (i.e. until December 31, 2012) to make a repayment. Any part of the indebtedness that remains outstanding on January 1, 2013 (in this case the original loan less two payments will be brought into the shareholder’s income under subsection 15(2) in the shareholder’s 2011 taxation year.
It should be noted that, where the indebtedness is not included under subsection 15(2), the shareholder would be subject to a taxable interest benefit calculated under section 80.4(2) for the number of days that the amounts remained owing each year. The interest benefit would be calculated as the amount, if any, by which the interest on the debt computed at the prescribed rate exceeds the amount of the interest actually paid by the shareholder not later than 30 days after the end of the corporation’s taxation year.

Reasons: CRA policy.

XXXXXXXXXX 2012-044252
Andrea Boyle, CGA
August 15, 2012

Dear XXXXXXXXXX:

Re: Shareholder Debt

I am writing in reply to your email dated April 3, 2012 in which you have asked us about the calculation of the shareholder benefit under subsection 15(2).

Specifically you have provided a hypothetical situation where an amount ($200,000) is loaned to a shareholder in January 2011 and is repayable to the corporation in five equal payments (of $40,000 per year) commencing December 31, 2011. The corporation has a December 31 year-end. You have asked how much of the loan must be included in the shareholder’s income under 15(2) for the 2011 taxation year.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

Subsection 15(2) generally requires a shareholder to include in income the amount of any loan received or indebtedness incurred from a corporation unless the loan or indebtedness is specifically excluded through other provisions.

Under subsection 15(2.6), a loan or indebtedness may be excluded from income if it is repaid within one year after the end of the taxation year of the lender or creditor corporation in which the loan was made or the indebtedness arose where it is established that the repayment was not part of a series of loans or other transactions and repayments.

In the situation you described, the taxation year of the corporation which includes the date on which the indebtedness arose is the 2011 taxation year (i.e. the indebtedness arose during the period from January 1, 2011 to December 31, 2011).

In this situation, the shareholder would have one year from December 31, 2011 (i.e. until December 31, 2012) to make a repayment. Any part of the indebtedness that remains outstanding on January 1, 2013 (in this case the original loan less two payments made which equals $120,000) will be brought into the shareholder’s income under subsection 15(2) in the shareholder’s 2011 taxation year.

It should also be noted that, where the indebtedness is not included under subsection 15(2), the shareholder would be subject to a taxable interest benefit calculated under section 80.4(2) for the number of days that the amounts remained owing each year. The interest benefit would be calculated as the amount, if any, by which the interest on the debt computed at the prescribed rate exceeds the amount of the interest actually paid by the shareholder not later than 30 days after the end of the corporation’s taxation year.

We trust that these comments will be of assistance.

Yours truly,

Doug Watson
for Director
Corporate Financing Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch