31 March 1999 Internal T.I. 9902567 - SHAREHOLDER'S 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Paragraph 27 of IT-119R4 indicates that repayments are considered to apply first to the oldest loan or debt outstanding (first-in, first-out basis) unless the facts clearly indicate otherwise. On the other hand, paragraph 36 includes an example of a running shareholder’s loan account which indicates that credits are applied on a FIFO basis unless specific allocation of the credit is requested by the debtor. XXXXXXXXXX Is the position in paragraph 36 relevant where a taxpayer does not wish to follow FIFO because a portion of a loan account was not included in a shareholder’s income (statute-barred years)?

Position: XXXXXXXXXX

Reasons: Refer to the Position.

		March 31, 1999

	Edmonton  Tax Services Office 	HEADQUARTERS
	Carol Mckenzie	M. Eisner
	Appeals Division	(613) 957-2138

990256

Repayments - Shareholder Loans

This is in reply to your facsimile dated January 28, 1999 concerning the above noted subject.

You have indicated that you are considering a situation where the loan account of a shareholder (the “Shareholder”) has been in a debit balance since 1980. An amount was included in the Shareholder’s income under subsection 15(2) of the Income Tax Act (the “Act”) for the 1989, 1990, and 1991 taxation years. While the shareholder loan account continued to remain in a debit balance, repayments and additional withdrawals have occurred. The Shareholder’s representative (the “Representative”) is of the view that the Shareholder should have the option of deciding how the repayments should be applied. In the case at hand, the Representative has indicated that repayments should first be applied to the 1989, 1990 and 1991 taxation years, as well as certain subsequent taxation years, so that deductions under paragraph 20(1)(j) of the Act can be utilized as soon as possible.

In relation to the Representative’s request, you have made reference to Interpretation Bulletin IT-119R4 “Debts of Shareholders and Certain Persons Connected With Shareholders” (the “Bulletin”) and a memorandum (the “Memorandum”) dated September 20, 1990 sent to the Edmonton Tax Services Office by Audit Applications Division (“AAD”). The Memorandum makes reference to the decision rendered by the Tax Review Board (“TRB”) in Edward C. Sargent v. MNR (83 DTC 572). Three excerpts from the Memorandum are set out below and are considered to reflect AAD’s opinion of the effect of the decision of the TRB in that case:

“In our opinion, the Sargent Case confirms our view that the taxpayer should be allowed to choose how the repayments should be applied.”

“We are of the opinion, therefore, that it would be appropriate (even though some of the advances in a shareholder’s loan account occurred in statute barred years) to permit the shareholder to choose how the particular repayments are applied. The FIFO basis should be used in cases where shareholders requested to have repayments applied on this basis or where they refuse to respond to the Department’s request as to how payments should be applied.”

“We have also asked the Publication Division to modify Interpretation Bulletin IT-119R3 to specify that taxpayers have the option to choose how repayments are applied in all cases regardless of whether or not they were made as part of a series of loans, other transactions and repayments.”

With respect to the above comments, you have made reference to paragraphs 27 and 36 of the Bulletin. Paragraph 27 states that “Repayments are considered to apply first to the oldest loan or debt outstanding (first-in, first-out basis) unless the facts clearly indicate otherwise”. On the other hand, paragraph 36 includes an example of a running shareholder’s loan account where the statement is made that “Credits are applied on a FIFO basis unless specific allocation of the credit is requested by the debtor”.

In your particular case, it appears that the Memorandum confirms the approach requested by the Representative. However, your concern is whether that approach has been superseded by the release of IT-119R4.

Our Comments

It is our understanding that the comments made in paragraph 36 of the Bulletin with respect to allowing specific allocations of repayments as requested by the debtor are consistent with those comments reflected in the Memorandum. Accordingly, the Bulletin does not appear to supersede the Memorandum with respect to that issue.

XXXXXXXXXX

For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.

Jim Wilson
Section Chief
Business, Property & Employment Section II
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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