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:
Are the conditions in paragraph 15(2.4) met, that is, at the time the loan was made, are there bona fide arrangements for repayment of the loan within a reasonable time?
Position TAKEN:
Yes.
Reasons FOR POSITION TAKEN:
Yes, the conditions in paragraph 15(2.4)(f) of the Act are met such that at the time the loans will be made, there will be bona fide arrangements made for the repayment of the loan within a reasonable time. The loans to employees of the Canco would require mandatory repayment of XXXXXXXXXX, with repayments applied against the mandatory principal repayments in the order they arise. Since XXXXXXXXXX% of the principal of the loan will be required to repaid by the employee within the XXXXXXXXXX-year loan period, it is our view that there will be bona fide arrangements made for the repayment of the loan within a reasonable time. The mandatory repayment schedule for the employee loans is consistent with normal commercial practice for investment loans made to high net worth individuals.
XXXXXXXXXX
XXXXXXXXXX 1999-001389
XXXXXXXXXX
XXXXXXXXXX, 2000
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Canco") (XXXXXXXXXX)
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of Canco and certain employees.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested rulings is being considered by a Tax Services Office or a Tax Centre in connection with an income tax return already filed and none of the issues is under objection or appeal.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1. Canco is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1) of the Income Tax Act (the "Act").
2.
XXXXXXXXXX
3. Canco's tax affairs are administered by the Canada Customs and Revenue Agency's ("CCRA") XXXXXXXXXX Tax Services Office.
4. Canco's fiscal period within the meaning of subsection 249.1(1) of the Act is XXXXXXXXXX.
PROPOSED TRANSCTIONS
5. Canco has proposed XXXXXXXXXX employees XXXXXXXXXX to pool XXXXXXXXXX make investments XXXXXXXXXX (the "XXXXXXXXXX") XXXXXXXXXX.
XXXXXXXXXX
XXXXXXXXXX
6. The XXXXXXXXXX will be established
XXXXXXXXXX.
7. The XXXXXXXXXX will act as the investment vehicle for employees XXXXXXXXXX.
8.
XXXXXXXXXX
XXXXXXXXXX
(i) XXXXXXXXXX
(ii) XXXXXXXXXX
XXXXXXXXXX
9. XXXXXXXXXX:
(i) XXXXXXXXXX
(ii) XXXXXXXXXX
(iii) XXXXXXXXXX
XXXXXXXXXX
10. XXXXXXXXXX expects to terminate by its XXXXXXXXXX.
11.
XXXXXXXXXX
12.
XXXXXXXXXX
13.
XXXXXXXXXX
14. Canco XXXXXXXXXX will offer to make loans to employees in connection with their investment XXXXXXXXXX. Generally, employees will be offered loans of up to XXXXXXXXXX times the amount of equity capital the employee invests from his or her own resources, although there is discretion to offer loans in greater proportion to equity in a particular case. An employee XXXXXXXXXX is free to accept or reject loans XXXXXXXXXX. Each employee who accepts a loan will receive such loan from the particular corporation XXXXXXXXXX by whom he or she is employed (the "Lender"). XXXXXXXXXX the "Loans".) XXXXXXXXXX. The terms of the Loans will provide that interest accrues at a rate that is XXXXXXXXXX basis points over the prescribed rate for purposes of the Act under Regulation 4301(c). The Loans to employees of Canco will require mandatory repayment of XXXXXXXXXX thereafter, with repayments applied against the mandatory principal repayments in the order they arise. The balance of the Loans will be due and payable on XXXXXXXXXX. Loans will be required to be prepaid out of XXXXXXXXXX. In addition, Loans are optionally pre-payable by the employee at any time. Employees will be required to pledge XXXXXXXXXX as security for obligations under the Loans.
The Loans have the following events of default:
(i) the default by the employee in the payment of the principal of, or interest on any Loan when due and payable, which continues for a period of XXXXXXXXXX days following notice;
(ii) any representation or warranty made by the employee to XXXXXXXXXX being false in any material respect when made;
(iii) the breach by the employee of any material covenant or agreement made in the notes evidencing the Loans XXXXXXXXXX;
(iv) XXXXXXXXXX
(v) the occurrence of certain events of insolvency with respect to the employee.
A Loan may be called by the Lender for immediate repayment upon the occurrence of an event of default.
If an employee's employment is terminated for cause, the Lender will be entitled to call the outstanding balance of such departed employee's Loan as immediately due and payable.
XXXXXXXXXX
15.
XXXXXXXXXX
16. XXXXXXXXXX:
(i) XXXXXXXXXX;
(ii) XXXXXXXXXX,
(a)
XXXXXXXXXX
(b)
XXXXXXXXXX
XXXXXXXXXX
17. The loans to employees of Canco would require mandatory repayment of XXXXXXXXXX thereafter, with repayments applied against the mandatory principal repayments in the order they arise.
Purpose of Proposed Transactions
18. The purpose of the proposed transactions is to permit XXXXXXXXXX employees of Canco and its affiliates to invest funds XXXXXXXXXX employees.
XXXXXXXXXX
XXXXXXXXXX
19.
XXXXXXXXXX
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Provided the employee is not a "specified employee" as defined in subsection 248(1) of the Act, by virtue of subsection 15(2.4) of the Act, the provisions of subsection 15(2) of the Act will not apply to an employee who is a shareholder of Canco or any of its affiliates in respect of Loans XXXXXXXXXX received by the employee from the employee's Lender XXXXXXXXXX.
B. Paragraph 20(1)(c) of the Act will apply to permit an employee a deduction in a taxation year equal to the amount of interest paid in the year or payable in respect of the year (depending on the method regularly followed by the employee in computing his or her income) on the Loans XXXXXXXXXX, to the extent that the borrowed funds continue to be used for the purpose of gaining or producing income.
C. In a taxation year, the provisions of subsections 6(9) and 80.4(1) of the Act will apply to include an amount in the income of an employee in respect of the Loans XXXXXXXXXX, equal to the amount by which the amounts described in paragraphs 80.4(1)(a) and (b) of the Act for such taxation year exceed the amounts described in paragraphs 80.4(1)(c) or (d) of the Act for such taxation year in respect of such Loans XXXXXXXXXX.
D. By virtue of the provisions of section 80.5 of the Act, paragraph 20(1)(c) of the Act will apply to permit an employee a deduction in a taxation year equal to the amount of the inclusion in income under subsection 80.4(1) of the Act for the year in respect of Loans XXXXXXXXXX, to the extent that the borrowed funds continue to be used for the purpose of gaining or producing income.
E. Apart from the application of subsection 6(9) of the Act as set out in Ruling C, the provisions of section 6 of the Act will not apply to include an amount in the income of an employee solely as a result of XXXXXXXXXX the receipt of the loans XXXXXXXXXX by the XXXXXXXXXX.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding provided that Canco commences the Fund before XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.
We wish to confirm that nothing in the above rulings should be construed as implying that the CCRA has agreed to or reviewed:
a) any income tax matters related to subdivision j of Division B of Part I of the Act and section 143.2 of the Act;
b) the consequences of earning income XXXXXXXXXX or the consequences of the settlement of the Loans or the Interest Loans;
c) XXXXXXXXXX;
d) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.
Yours truly,
XXXXXXXXXX
A/Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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