3 April 2000 External T.I. 2000-0013135 - WHETHER LOAN ORDINARY LENDER'S BUSINESS

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: Whether the exemption in subsection 15(2.3), which provides, inter alia, that subsection 15(2) does not apply to a "loan made in the ordinary course of the lender's ordinary business of lending money," will apply in a situation in which a company ceases or reduces its active business, and, as a result, it will have money to invest. It is considering lending money to an individual who does not deal at arm's length with it.

Position: This question requires a factual determination, but the likely answer is no.

Reasons: Based on jurisprudence and our position in IT442R.

XXXXXXXXXX 	J. Gibbons
		2000-001313
Attention:  XXXXXXXXXX 

April 3, 2000

Dear XXXXXXXXXX:

We are replying to your letter of March 2, 2000, in which you requested our views concerning the application of subsections 15(2) and 15(2.3) of the Income Tax Act. In particular, you wish to know whether the exemption in subsection 15(2.3), which provides, inter alia, that subsection 15(2) does not apply to a "loan made in the ordinary course of the lender's ordinary business of lending money," will apply to the situation described in your letter.

As requested, we have considered the situation outlined in your letter and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Thus, our comments, based on the following hypothetical facts, are of a general nature only.

Facts

1. The corporate taxpayer, B Ltd., carries on an active business in Canada.

2. B Ltd. is owned by a married couple, Mr. and Mrs. B.

3. B Ltd. will cease or reduce its active business, and, as a result, it will have money to invest.

4. B Ltd. is considering lending money to an individual ("C") who does not deal at arm's length with it.

5. The loan to C would be secured by a second mortgage on a principal residence and would be payable over a 15 to 20 year period at a reasonable rate of interest.

In relation to the foregoing facts, you enquire whether:

a) The exemption in subsection 15(2.3) would apply?

b) The fact that this would be B Ltd.'s first investment would prevent subsection 15(2.3) from applying?

c) The answer would differ if the money lent to C is not secured by the second mortgage?

Our views

It is our understanding that your main concern in regard to the particular situation is whether B Ltd.'s ordinary business can be considered to be the lending of money. The issue of whether subsection 15(2.3) of the Act applies in any particular case is ultimately a question of fact. For example, in the particular case at hand, it would have to be determined factually whether the loans were made "in the ordinary course of the lender's ordinary business of lending money" and whether at the time the loans were made, bona fide arrangements were made for their repayment within a reasonable time. Additional information would be required before we could make either of these determinations.

In the British case of Litchfield v. Dreyfus, ((1906) 1KB 584), Judge Farwell defined money-lending business at page 589 as follows: "Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible... It is a question of fact in each case". In George A. Orban v. M.N.R., 54 DTC 148 (TAB), Judge Fordham considered whether the taxpayer, who made no loans other than the three mentioned in the case (a loss being realized on two of the loans), was a money lender. According to the facts of this case, the taxpayer had some money available but this fact was known to only a few individuals with whom he was acquainted. Moreover, the taxpayer never advertised himself, nor was he listed anywhere as a money lender. Judge Fordham held that, in order for a man to be a money lender, there must be a certain degree of system and continuity in his transactions, and he found on the facts that these elements were not present.

The Agency's position on whether a taxpayer's business included the lending of money is summarized in paragraph 11 of IT-442R. This paragraph states that, when determining whether a taxpayer's business included the lending of money, it is not sufficient merely to find that loans are made, but rather the loans must be made as an integral part of a business operation. In this regard, paragraph 11 goes on to state that there must be a certain system and continuity in the making of loans, and the purpose must not be the occasional investment of surplus funds, accommodation to friends or customers or advances that are intended to remain a part of the capital of the borrower. Based on the information provided, it is our view that it is unlikely that one could conclude that B Ltd.'s ordinary business included the lending of money. Additionally, even if the loan to C is secured by a second mortgage, our answer remains the same.

We trust that these comments will be of assistance.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate

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