2001 2000-0057901 - 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:

Does the fact that the employee's fund is subject to a lower "carried interest" than is generally available to Canco result in an employment benefit pursuant to paragraph 6(1)(a)?

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

Reduced carried interest is primarily the result of factors other than the fact that the fund participants are also employees of Canco.

XXXXXXXXXX 2000-005790

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Amendments to Advance Income Tax Ruling 2000-004477 (the "Ruling Letter")
XXXXXXXXXX ("Canco") (XXXXXXXXXX)

This is in reply to your letter of XXXXXXXXXX, wherein you advised us of certain changes to the proposed transactions surrounding the Ruling Letter and requested confirmation of that earlier ruling. We also acknowledge our telephone conversations (XXXXXXXXXX) of XXXXXXXXXX.

As requested, the Ruling Letter is hereby amended as follows:

1. Paragraph 13 is hereby replaced with:

XXXXXXXXXX

2. Paragraph 14 is hereby replaced with:

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 provide that principal repayments will be required on the XXXXXXXXXX anniversaries of the commencement of the Fund in the amount of XXXXXXXXXX% of the Loans. The Loans will be due and payable on the day preceding the XXXXXXXXXX anniversary of the establishment of the fund or such earlier termination date as 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 XXXXXXXXXX as security for obligations under the Loans.

XXXXXXXXXX

3. Paragraph 17 is hereby replaced with:

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.

4. The second sentence of paragraph 18 is hereby replaced with:

XXXXXXXXXX

5. Ruling E is hereby replaced with:

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, the receipt of the Loans or the Interest Loans by the employee in connection with their investment XXXXXXXXXX, or the lower carried interest as described in paragraph 13 above.

Notwithstanding the above changes, we confirm that, subject to the conditions set out therein, Rulings A through E given in the Ruling Letter, as hereby amended, will continue to be binding on the Canada Customs and Revenue Agency in accordance with the practice outlined in Information Circular 70-6R3, dated December 30, 1996, provided that the proposed transactions described in the Ruling Letter are completed in the manner described therein by XXXXXXXXXX.

Yours truly,

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