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:
Corporation is proposing to loan funds to the daughter and son-in-law of the company's shareholders. The daughter and son-in-law will use the proceeds to purchase a farm in another province. The loan would be secured by a mortgage against the property to be purchased, would have a competitive interest rate, and would require monthly payments.
Would subsection 15(2.3) apply so that subsection 15(2) would not apply to the loan?
Position TAKEN:
Insufficient information provided. Likely no. General comments provided.
Reasons:
Based on jurisprudence and position in IT-442R.
XXXXXXXXXX 2001-006796
T. Young, CA
March 23, 2001
Dear XXXXXXXXXX:
Re: Shareholder Benefit
This is in reply to your letter of January 5, 2001, concerning the application of subsection 15(2) of the Income Tax Act (the "Act") in respect of a proposed loan by a corporation to the daughter and son-in-law of the corporation's shareholders.
In your letter, you stated that the amount of the loan would be approximately $XXXXXXXXXX and would be used to buy a dairy farm. The loan would be secured by a mortgage against the property to be purchased and would have a competitive interest rate attached to it with monthly repayments.
You indicated that the corporation has, in the past, loaned money to persons not related to the shareholders and attached a schedule showing some details of the company's outstanding loans from XXXXXXXXXX. You also indicated that most of the loans were secured by promissory notes or mortgages and that the borrowers were previously known to the shareholders through social or other contacts.
Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4, dated January 29, 2001. Therefore, we can only provide you with the following general comments.
When a shareholder or a person connected to a shareholder of a corporation receives a loan or otherwise becomes indebted to the corporation, subsection 15(2) of the Act applies to include the amount of the loan or indebtedness in the person's income. By virtue of subsection 15(2.1) of the Act, connected persons includes persons with whom the shareholder does not deal at arm's length such as a shareholder's child or the child's spouse.
Subsection 15(2.3) of the Act states that subsection 15(2) of the Act does not apply to a debt that arose in the ordinary course of the creditor's business or to a loan made in the ordinary course of the lender's ordinary business of lending money where, at the time the indebtedness arose or the loan was made, bona fide arrangements were made for repayment of the debt or loan within a reasonable time. It is our understanding that your main concern is whether subsection 15(2.3) of the Act would apply to the proposed loan.
The issue of whether subsection 15(2.3) of the Act applies in any particular case is ultimately a question of fact. The CCRA's position on whether a taxpayer's business includes 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 a loan is made, but rather that the loan is 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.
It is unclear from your letter what the ordinary business of the corporation in question is. However, based on the information provided, it is our view that it is unlikely that one could conclude that the corporation's ordinary business includes the lending of money. As a result, subsection 15(2) of the Act would likely apply to the proposed loan.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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