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(2.4) of the Act applies to a loan received by a specified employee where the loan is used by the specified employee to acquire a dwelling for his/her habitation.
Position: Question of fact.
Reasons:
The exception in paragraph 15(2.4)(b) of the Act will generally not apply to a loan to a specified employee. Our general position is that benefits are received as a shareholder, not an employee, where the shareholder can significantly influence the business policies of the corporation. Accordingly, subsection 15(2) of the Act will apply to the loan. Nevertheless, there may be situations where all of the requirements of subsection 15(2.4) of the Act are satisfied such that subsection 15(2) of the Act won't apply in those situations.
XXXXXXXXXX 2000-005999
A. Seidel, CMA
Attention: XXXXXXXXXX (613) 957-2058
January 9, 2001
Dear XXXXXXXXXX:
Re: Shareholder Loan
This is in reply to your letter dated December 4, 2000 in which you requested our views with respect to the application of subsections 15(2) and 15(2.4) of the Income Tax Act (the "Act") in a situation where a "specified employee", within the meaning thereof in subsection 248(1) of the Act, receives a loan for the purpose of acquiring a dwelling for the employee's personal habitation. You asked us to consider the situation where the corporation has only 2 employees who are both specified employees (each owns 50% of the shares of the corporation).
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, 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 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 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(2.4) of the Act provides specific exceptions to the application of subsection 15(2) of the Act. Paragraph 15(2.4)(b) of the Act provides that subsection 15(2) of the Act will not apply to a loan made, or a debt that arose:
- in respect of an individual who is an employee of the lender or creditor;
- to enable or assist the individual to acquire a dwelling, provided that the dwelling is acquired for the individual's habitation;
- when it is reasonable to conclude that the loan or indebtedness was received because of the individual's employment rather than because of any person's share-holdings; and
- provided that bona fide arrangements were made for the repayment of the loan or indebtedness at the time it was incurred.
Whether or not a loan or other indebtedness was received by an individual in his or her capacity as a shareholder or as an employee is a question of fact which can only be determined by reviewing the terms and conditions relating thereto and by reviewing the relationship between the two parties at the time the loan was made or the indebtedness arose.
In considering the issue of whether or not "benefits" are conferred upon an individual by virtue of his or her shareholdings in, or as an employee of, a corporation, it has generally been our view that "benefits" are received by an individual by virtue of his or her shareholdings in the corporation where the shareholder can significantly influence business policy.
Similarly, it is our view that an employee-shareholder would receive a loan from a corporation by virtue of his/her shareholdings where he/she can significantly influence business policy. This is especially true where there are only two shareholders (who are also the only employees), each of whom owns 50% of the voting shares of the corporation. Nevertheless, if an employee-shareholder can establish that employees with similar duties and responsibilities to another employer of similar size, but who are not shareholders of that other employer-corporation, received loans or other indebtedness of similar amounts under similar conditions as that granted to the employee-shareholder, the employee-shareholder may be able to satisfy the requirements of paragraph 15(2.4)(e) of the Act. In such a case, and provided that all of the other requirements of subsection 15(2.4) of the Act are otherwise satisfied, subsection 15(2) of the Act may not apply to a loan made to an employee-shareholder to acquire a dwelling for that individual's habitation.
Yours truly,
John Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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