2000 Ruling 2000-0044773 - EMPLOYEE/SHAREHOLDER 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:

Are the conditions in paragraph 15(2.4)(f) 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:

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. Since XXXXXXXXXX % of the principal of the loan will be required to be 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 2000-004477

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. We also acknowledge your letter of XXXXXXXXXX, and our telephone conversations (XXXXXXXXXX) of XXXXXXXXXX.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts; or

(v) subject to a ruling previously issued by the Income Tax Rulings Directorate.

In this letter, unless otherwise expressly stated, "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and unless otherwise stated, every reference herein to a section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

1. Canco, XXXXXXXXXX, is a "public corporation" and a "taxable Canadian corporation" within the meaning of subsection 89(1) .

2. XXXXXXXXXX.

3. Canco's tax returns are filed at the XXXXXXXXXX Taxation Centre.

4. Canco's current head office address is as follows:

XXXXXXXXXX.

5. The fiscal period of Canco within the meaning of subsection 249.1(1) is XXXXXXXXXX.

PROPOSED TRANSACTIONS

6. Canco has proposed XXXXXXXXXX to make XXXXXXXXXX.

7. XXXXXXXXXX.

8. XXXXXXXXXX.

9.

XXXXXXXXXX

10. XXXXXXXXXX.

11. XXXXXXXXXX.

12. XXXXXXXXXX.

13. XXXXXXXXXX.

14. XXXXXXXXXX, Canco XXXXXXXXXX will offer to make loans to employees (the "Loans") XXXXXXXXXX . Employees will be offered Loans of XXXXXXXXXX times the amount of equity capital the employee invests from his or her own resources XXXXXXXXXX. An employee XXXXXXXXXX is free to accept or reject Loans XXXXXXXXXX. Each employee of Canco or its affiliated companies who accepts a Loan will receive such Loan from the particular corporation by whom he or she is employed (the "Lender"). The terms of the Loans will provide that interest accrues at not less than the prescribed rate for purposes of the Act under Income Tax Regulation 4301(c). The Loans will be due and payable on a specified date not later than the XXXXXXXXXX anniversary termination date, or such earlier termination date as may be established under paragraph 11 above. Loans will be required to be prepaid out of XXXXXXXXXX. In addition, the 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.

XXXXXXXXXX.

15. XXXXXXXXXX. Each employer corporation will make the loans to its own employees XXXXXXXXXX.

16. XXXXXXXXXX, it may be determined that loans to non-resident employees of Canco will not be made by a non-resident subsidiary of Canco, but will be made by Canco itself. As a result these loans will not fall within the exception to subsection 15(2) contained in subsection 15(2.2) applicable to indebtedness between non-resident persons. Accordingly, loans to these individuals will be made on substantially the same terms and conditions as apply to Canadian resident employees XXXXXXXXXX, including the same schedule of mandatory principal repayments and an interest rate at least equal to the prescribed rate under Income Tax Regulation 4301(c).

17. XXXXXXXXXX. The Lender will provide the employee with a loan (the "Interest Loan") on substantially the same terms as the Loans described above in order to fund the payment of any excess interest in these circumstances, if the employee requests.

18. XXXXXXXXXX.

PURPOSE OF PROPOSED TRANSACTIONS

19. The purpose of the proposed transactions is to permit certain employees of Canco and its affiliates to invest funds XXXXXXXXXX.

20. XXXXXXXXXX.

RULINGS GIVEN

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 Lender is the employer and the employee is not a "specified employee" as defined in subsection 248(1), by virtue of subsection 15(2.4), the provisions of subsection 15(2) will not apply to an employee who is a shareholder of Canco or any of its affiliates in respect of Loans or Interest Loans received by the employee from the Lender in connection with their investment XXXXXXXXXX. For greater certainty, where the employee is a non-resident of Canada and subsection 15(2) does not apply to the shareholder by virtue of subsection 15(2.4), no amount shall be deemed to have been paid to the non-resident as a dividend from a corporation resident in Canada under paragraph 214(3)(a).

B. Paragraph 20(1)(c) 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 and the Interest Loans received in connection with their investment XXXXXXXXXX, including such interest where it is paid by the employee out of the proceeds of an Interest Loan, 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) will apply to include an amount in the income of an employee in respect of the Loans and the Interest Loans received in connection with their investment XXXXXXXXXX, as the case may be, equal to the amount by which the amounts described in paragraphs 80.4(1)(a) and (b) for such taxation year exceed the amounts described in paragraphs 80.4(1)(c) or (d) for such taxation year in respect of such Loans or Interest Loans. For this purpose, interest described in paragraph 80.4(1)(c) will include such interest where it is paid by the employee out of the proceeds of an Interest Loan. For greater certainty, where the employee is a non-resident of Canada, no amount shall be deemed to have been paid to the non-resident as a dividend from a corporation resident in Canada under paragraph 214(3)(a).

D. By virtue of the provisions of section 80.5, paragraph 20(1)(c) 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) for the year in respect of Loans and Interest Loans received in connection with their investment 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) as set out in Ruling C, the provisions of section 6 will not apply to include an amount in the income of an employee solely as a result of XXXXXXXXXX, the acquisition by an employee of XXXXXXXXXX or the receipt of the Loans or the Interest Loans by the employee in connection with their investment 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 XXXXXXXXXX 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.

COMMENTS

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 and section 143.2;

b) the consequences of earning income or receiving distributions XXXXXXXXXX or the consequences of the settlement of the Loans or the Interest Loans;

c) any tax consequences, including the possible application of section 17, relating to the loans made by Canco to its affiliated corporations as described in paragraph 15 above;

d) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein.

Yours truly,

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