CRA confirms that the mere granting by a corporation of security for a bank loan to a shareholder did not engage the B2B loan rules
In 2017-0690691E5 F, a 50% limited partner (Ms. X) funded her investment in an LP jointly owned with her husband through a $3M bank loan that was secured by a pledge to the bank of a $3M term deposit of the bank held by a corporation (Corporation B) equally owned by her and her husband. In finding that the back-to-back loan rules in s. 15(2.6) et seq. deemed her to owe $3M to Corporation B, CRA indicated that:
- Ms. X had an amount outstanding ($3M) to an “immediate funder” (the bank),
- an amount (the $3M term deposit) was owing by the immediate funder to an “ultimate funder” (Corporation B), and
- "the condition in clause 15(2.16)(c)(i)(B) would be satisfied" (e.g., the $3M loan was permitted to remain outstanding because the term deposit was outstanding).
CRA was subsequently asked about a variation of these facts in which, rather than the $3M term deposit being used, the bank was granted a right to encumber one of Corporation B’s properties. CRA confirmed that in this situation, s. 15(2.16)(c)(i) would not apply, i.e., there no longer were back-to-back amounts owing. Respecting whether the specified right rule in s. 15(2.16)(c)(ii) applied, CRA stated that this would require a comprehensive review, but noted that:
If, under the arrangement between the parties, the bank can only exercise its right to encumber in order to secure payment of Ms. X’s $3M shareholder debt (for example, by placing a lien on the encumbered property to ensure that Corporation B cannot dispose of it without the bank’s consent), then the exception in parentheses would be met and the right to encumber would not constitute a specified right.
Neal Armstrong. Summary of 8 May 2018 CALU Roundtable, Q.1, 2018-0745491C6 under s. 15(2.16)(c).