14 December 2000 External T.I. 2000-0044105 - SHAREHOLDER LOANS & REPAYMENTS

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 exception in subsection 15(2.6) of the Act applies in the situation where a shareholder receives and repays more than one loan in within the time allowed in the subsection.

Position: Question of fact.

Reasons: The exception will only apply if the loans and repayments are not part of " a series of loans or other transactions and repayments".

XXXXXXXXXX 2000-004410
A. Seidel
Attention: XXXXXXXXXX

December 14, 2000

Dear Sir:

Re: Shareholder Loans and Repayments

This is in reply to your letter dated August 25, 2000 in which you requested our views with respect to the application of subsections 15(2) and 15(2.6) of the Income Tax Act (the "Act") in a situation where a number of loans are repaid within one year of the taxation year end of the corporation that lent the money to the shareholder.

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3 ("IC-6R3"), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Subsection 15(2) of the Act provides, amongst other things, that in the situation where a shareholder has received a loan from, or has become indebted to, a corporation, the amount of the loan or indebtedness is included in computing the income of the shareholder for the year in which the loan was received or the indebtedness arose. Subsection 15(2.6) of the Act provides an exception to subsection 15(2) of the Act and applies in those situations where a loan or an indebtedness is repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose and provided that the repayment is not part of a series of loans or other transactions and repayments. In addition, paragraph 20(1)(j) of the Act provides a deduction to a shareholder in the year that a shareholder makes a repayment of any part of a loan or indebtedness that was previously included in computing the shareholder's income pursuant to subsection 15(2) of the Act unless the repayment is part of a series of loans or other transactions and repayments or the amount of the loan or indebtedness was otherwise deductible by the shareholder for the purpose of computing the shareholder's taxable income for that preceding taxation year.

Whether or not any loans received, or other indebtedness incurred, by a shareholder and any subsequent repayments thereof is part of a "series of loans or other transactions and repayments" is a question of fact which can only be determined after reviewing all of the details relating to a particular shareholder. In the situation where it is determined that a series of loans and repayments exists, subsection 15(2) of the Act will apply to include such loans in the income of the shareholder in the taxation year that the loan is received or the indebtedness arose regardless of whether any of the loans or indebtedness is repaid within one year of the end of the taxation year of the corporation that was the lender or creditor. Provided that the subsequent repayment of a loan or an indebtedness satisfies all of the requirements of paragraph 20(1)(j) of the Act, the shareholder will be entitled to deduct the repayment thereof in the taxation year in which the repayment is made.

In your letter you have requested confirmation that the repayment of an original loan and any subsequent loans, all of which are within the time period referred to in subsection 15(2) of the Act, would not be considered to be a "series of loans ... and repayments" for purposes of subsection 15(2.6) of the Act. In the situation where a shareholder is repaying more than one loan or indebtedness within the time frames in subsection 15(2.6) of the Act on an ongoing basis, we cannot necessarily agree that these loans and indebtedness and the repayment thereof would not be regarded as being part of a series of loans and repayments such that the exception in subsection 15(2.6) of the Act would not apply to all of the loans. In our view, subsection 15(2) of the Act would therefore likely apply to any loans or other indebtedness received by a shareholder in a taxation year.

Yours truly,

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

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