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: Whether advances from a corporation controlled by a shareholder to another corporation result in benefits that are taxable to the shareholder under subsection 15(1) or 56(2). Whether any interest paid on money borrowed for these purposes is deductible under paragraph 20(1)(c).
Position: Not all the facts have been provided, however, based on the known facts, it may be possible to take the position that the advances result in benefits that are taxable to the shareholder under subsection 15(1). To the extent that the borrowed money was used for these purposes any interest paid would not be deductible.
Reasons: The law.
February 22, 2002
XXXXXXXXXX HEADQUARTERS
XXXXXXXXXX Tax Services Office Reorganizations and
Tax Avoidance Section Resources Division
Michael Cooke
(613) 957-2126
2001-010186
XXXXXXXXXX
We are writing in response to your memorandum dated September 14, 2001, wherein you requested our views concerning the application of subsections 15(1) and 56(2) of the Income Tax Act (the "Act") where a corporation advances funds to another corporation at the direction of the controlling shareholder.
Facts
1. XXXXXXXXXX is an individual resident in Canada. XXXXXXXXXX owns all the shares of the following taxable Canadian corporations:
Legal Name
Nature of Business
XXXXXXXXXX . ("Pco")
XXXXXXXXXX
XXXXXXXXXX . ("Gco")
XXXXXXXXXX
XXXXXXXXXX . ("Cco")
XXXXXXXXXX
XXXXXXXXXX . ("Bco")
XXXXXXXXXX
2. On XXXXXXXXXX acquired XXXXXXXXXX% of the shares of a new corporation, XXXXXXXXXX (hereinafter referred to as "Newco"). XXXXXXXXXX other persons own the remaining XXXXXXXXXX% of the shares of Newco, none of whom are related, within the meaning of the Act, to XXXXXXXXXX or each other. No shareholder of Newco owns a sufficient number of shares to control Newco alone.
3. XXXXXXXXXX.
4. Three of the corporations owned by XXXXXXXXXX made advances to Newco from XXXXXXXXXX to XXXXXXXXXX as follows:
Pco
Amount
Date
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXX1
XXXXXXXXXX
Gco
Amount
Date
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Cco
Amount
Date
XXXXXXXXXX
XXXXXXXXXX
The above amounts were recorded in the particular "lending" corporation's books as intercompany loans to Newco (collectively referred to as the "Loans"). XXXXXXXXXX has stated that there are no loan agreements for any of these Loans. Consequently, there are no specified terms for repayment, security or interest charged for any of these Loans and, subject to the treatment of the $XXXXXXXXXX received by XXXXXXXXXX from Newco, as described in paragraph 5 below, none of these Loans have been repaid to date. We also understand that Newco has recorded these Loans in the shareholder loan account maintained for XXXXXXXXXX but has also identified the particular corporation that was the source of such funds where possible.
5. On XXXXXXXXXX received $XXXXXXXXXX from Newco. This amount was deposited into XXXXXXXXXX personal bank account and Newco recorded this amount in XXXXXXXXXX shareholder loan account. On XXXXXXXXXX, an adjusting journal entry was made in Pco's books to record the $XXXXXXXXXX as a shareholder loan to XXXXXXXXXX from Pco and the amount of the intercompany loan receivable owing from Newco to Pco was correspondingly reduced by this same amount.
6. On XXXXXXXXXX also re-mortgaged his personal residence at XXXXXXXXXX with XXXXXXXXXX for $XXXXXXXXXX and personally advanced $XXXXXXXXXX to Newco. On XXXXXXXXXX personally advanced a further $XXXXXXXXXX to Newco. Newco recorded these amounts in XXXXXXXXXX shareholder loan account along with the other Loans described in paragraphs 4 and 5. There are no loan agreements for any of the personal advances made by XXXXXXXXXX to Newco such that there are no terms for repayment, security or any interest charged for any of these amounts.
Your View
It is your view that the Loans from Pco, Gco and Cco to Newco, as described in paragraph 4 above, do not represent bona fide loans from the respective companies but rather represent appropriations of corporate property by XXXXXXXXXX, or corporate property transferred to Newco at the direction of or with the concurrence of XXXXXXXXXX either for his benefit or as a benefit he desired to confer on Newco. Accordingly, you propose to reassess XXXXXXXXXX taxation years (XXXXXXXXXX taxation year is statute barred) to include the amount of the Loans made in XXXXXXXXXX income for the taxation year in which the particular amounts were paid to Newco pursuant to subsection 15(1) of the Act, or alternatively, subsection 56(2) of the Act.
You maintain that your position is supported by a similar fact situation dealt with by the Federal Court-Trial Division in Vine Estate v. The Queen, 89 DTC 5528 ("Vine Estate") and request our views on this matter.
You also request our views on the deductibility of the interest paid by Bco on its loan from XXXXXXXXXX (the "XXXXXXXXXX Loan") under paragraph 20(1)(c) where the XXXXXXXXXX Loan proceeds were used, in whole or in part, to fund a portion of any of the Loans to Newco.
Subsection 15(1) of the Act requires the amount or value of any benefit that is conferred on a shareholder (or on a person in contemplation of the person becoming a shareholder), by a corporation to be included in the shareholder's income for a taxation year, subject to certain listed exceptions, unless the amount has otherwise been deemed by section 84 to be a dividend.
Subsection 56(2) of the Act, requires the amount of any payment or transfer of property, that is made to another person pursuant to the direction of, or with the concurrence of the taxpayer either for the taxpayer's benefit or as a benefit the taxpayer desired to have conferred on that other person, to be included in the taxpayer's income if the payment or transfer of property, if made directly to the taxpayer, would have otherwise been included in the taxpayer's income (see paragraph 1 of Interpretation Bulletin IT-335R).
A benefit under subsection 15(1), while not specifically defined in the Act, would include just about any payment, appropriation of property or advantage conferred on the shareholder by the corporation.2 As indicated in paragraph 5 of Interpretation Bulletin IT-432R2, a benefit will normally not be considered to have been conferred on a shareholder where the transaction is a bona fide business transaction. Consequently, subsection 15(1) is ordinarily not applied where a shareholder owes money to a corporation under a genuine or bona fide loan arrangement.3
The above views are consistent with the court decisions in Robert Davisson v. The Queen, 2000 DTC 2140 (TCC), Patrick Riddell and Sparkle Car Wash Ltd. v. The Queen, 95 DTC 5530 (FCTD), Tony Mele and Tony Mele Inc. v. MNR, 85 DTC 88 (TRB) and Vine Estate. In each of these cases, the court dealt with a fact situation whereby funds were diverted or allegedly loaned by the taxpayer's corporation to a third party without interest, security or arrangement for repayment, and in each situation, it was determined that subsection 15(1) applied because the shareholder received a benefit as a result of such payment.
In the present case, XXXXXXXXXX may have valid business reasons for causing his corporations to make these Loans to Newco notwithstanding the fact that there does not appear to be any loan documentation. However, we have not been able to obtain any additional information to this effect nor have we been provided with any information as to how Newco treats these Loans in its books and records or financial statements. In this regard, it would also be useful to know if the other shareholders of Newco were required to contribute a proportional amount of funds to Newco, and if so, whether such amounts were made as share capital or as loans. If the other shareholders of Newco made proportional contributions solely as share capital, then this would support the position that the Loans made by XXXXXXXXXX should have constituted payment for XXXXXXXXXX shares of Newco and were not genuine or bona fide loans such that the Loans would represent appropriations of corporate property for XXXXXXXXXX benefit under subsection 15(1).
Consequently, while there is some legal support for taking the position that subsection 15(1) could apply to include the amount of these Loans in XXXXXXXXXX income it is our view that all attempts to obtain the additional information described above should be made before you proceed with your proposed reassessment on this issue.
Regarding the issue of the deductibility of interest paid by Bco on the XXXXXXXXXX Loan, it is our view that to the extent that all or a portion of the XXXXXXXXXX Loan proceeds were used by Bco, or a related corporation, to fund any Loan to Newco that is subject to the application of subsection 15(1), as described above, the amount of any interest paid in respect thereof would not be deductible under paragraph 20(1)(c) of the Act. Even if subsection 15(1) did not apply to these Loans, any interest paid by Bco on the XXXXXXXXXX Loan proceeds that were used by Bco to fund the Loans would not be deductible under paragraph 20(1)(c) since Bco did not directly use the borrowed money for an income earning purpose. Moreover, our policy for permitting a deduction for interest paid on borrowed money where the loan proceeds are loaned by a shareholder to a subsidiary corporation without a reasonable rate of interest being charged, as described in paragraph 7 of Interpretation Bulletin IT-445, would not be met since Bco did not loan these amounts to its subsidiary and has no potential to directly or indirectly earn income from the loaned amount.
Should you wish to discuss any issues raised in this memorandum, please contact Michael Cooke at 957-2126.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their database. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. You should make request for this latter version to Jackie Page at (819) 994-2898. The severed copy will be sent to you for delivery to the client.
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
ENDNOTES
1 On XXXXXXXXXX, Bco borrowed $XXXXXXXXXX under a credit facility it had with the XXXXXXXXXX (the "XXXXXXXXXX Loan"). On that same day, Bco advanced $XXXXXXXXXX of these funds to Pco. This advance was recorded as an intercompany loan.
2 Based on the wording of subsection 56(2) and the decision in McClurg v. The Queen, 91 DTC 5001 (SCC) and Jones v. The Queen, 96 DTC 6015 (FCA) it appears that for subsection 56(2) to apply not only must one find that a benefit has been conferred on a person; it must be evident that the taxpayer "desired" to confer the benefit on that person. However, subsection 15(1) does not have such a requirement.
3 Subsection 15(2) of the Act deals with situations involving genuine loans made by a corporation to a shareholder (or a person connected with such a shareholder). Subject to certain other exclusions, subsection 15(2) does not apply where the debtor is a corporation resident in Canada or where the loan to a shareholder (other than a corporation resident in Canada) is actually repaid within one year (assuming there is no series of loans and repayments).
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content