27 March 2002 External T.I. 2001-0089605 - 15(1), 15(2)

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Where a corporation loans money to one of its shareholders and takes back a debt instrument from the shareholder as consideration for the loan, whether the corporation confers a benefit with respect to such loan to the shareholder under subsection 15(1)?

Position:

Provided that the fair market value of the debt instrument equals the principal amount of the loan, no benefit will arise with respect to such loan under subsection 15(1).

Reasons: As stated above.

XXXXXXXXXX 2001-008960
Daniel Wong
(613) 954-4949
March 27, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request: Subsection 15(1) or 15(2)

This is in reply to your letter of June 18, 2001 wherein you requested our opinion as to whether the loan received by Mr. A from X Co. as described below will be subject to the application of subsection 15(1) or (2) of the Income Tax Act ("Act").

Mr. A owns all of the shares of the capital stock of a Canadian-controlled private corporation, X Co. X Co. is not in the business of lending money. Prior to Mr. A's impending marriage, he will borrow $150,000 from X Co. ("Loan I") and will issue to X Co. a non-interest bearing promissory note with a principal amount equal to $150,000 ("Mr. A Promissory Note"), which note will be secured by a mortgage ("Mortgage") against his residence. Mr. A's residence is unencumbered and is valued at $100,000. Mr. A will then loan $150,000 to X Co. ("Loan II") and as consideration for such loan, X Co. will issue to Mr. A a non-interest bearing promissory note with a principal amount equal to $150,000("X Co. Promissory Note").

The purpose of such loaning and re-loaning transactions described in the scenario is to protect Mr. A's interest in his principal residence in the event of a marital breakdown, as Mr. A's principal residence will be encumbered by the Mortgage and the X Co. Promissory Note held by Mr. A will be protected, because such note will be an asset owned by Mr. A prior to the marriage. You queried whether

(a) the $150,000 loan to Mr. A would give rise to a benefit under subsection 15(1) or (2) of the Act; and

(b) whether the tax consequences would be different if both the Mr. A Promissory Note and the Mortgage

(i) were interest bearing at a rate equal to the prescribed interest rates at the time of the lending transaction; or

(ii) were issued at the same value as Mr. A's principal residence (i.e. $100,000).

Our Comments

In your letter, you outlined what appears to be an actual fact situation related to transactions and events which have taken place. The review of such situations is generally the responsibility of the local taxation services offices and, as outlined in paragraph 22 of Information Circular 70-6R4, it is not our practice to provide specific opinions on factual situations otherwise than in the context of an advance income tax ruling. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact. Nevertheless, we are prepared to provide the following comments that we hope will be of assistance to you.

Where at any time in a taxation year a benefit is conferred on a shareholder, or on a person in contemplation of the person becoming a shareholder, by a corporation otherwise than by one of the transactions described in paragraphs 15(1) (a) to (d), the amount or value of such benefit shall be included in computing the income of the shareholder for the year under subsection 15(1).

In our view, where a debt instrument, that is granted by a shareholder borrower to a corporate lender as consideration for a loan given by the lender to the borrower, has a fair market value which is equal to the principal amount of the loan, no benefit will arise with respect to such loan. Factors that may affect the value of the debt instrument include the interest rate and the value of the security that is pledged for repayment of the loan, for example, a mortgage. In the case at hand, the fact that Mr. A has a loan receivable from X Co., which receivable amount is equal to Mr. A's loan payable to X Co., may also affect the value of the Mr. A Promissory Note.

Further, where Loan I is not one of the excepted loans described in paragraphs 15(2.4)(a) to (d) and it has not been repaid by Mr. A within one year after the end of the taxation year of X Co in which Loan I is made, such loan amount should be included in computing Mr. A's income for the year under subsection 15(2). However, where Mr. A has repaid Loan I in a particular subsequent taxation year, he will be entitled to deduct such repayment for the particular taxation year, provided that he meets the requirements of paragraph 20(1)(j).

These comments are provided in accordance with paragraph 22 of Information Circular 70-6R4.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
3
- -