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 a loan by a closely-held private corporation to an arm's length employee to enable that employee to acquire shares of the corporation from the controlling shareholder will be caught by paragraph 15(2.4)(e). That is, will the loan be considered to be received because of the controlling shareholder's shareholdings, since the loan will be made at the direction of, or with the concurrence of, the controlling shareholder(s), and will be used to fund the acquisition of shares from such shareholder(s).
Position: Question of fact. However, if a loan is made at the direction of a controlling shareholder to enable an employee to buy shares from such a shareholder, our general view is that the employee received the loan "because of any person's shareholding".
Reasons: General views.
XXXXXXXXXX J. Gibbons, CGA
2002-011849
February 19, 2002
Dear XXXXXXXXXX:
We are replying to your letter dated January 7, 2002, in which you requested our comments concerning the interpretation of paragraph 15(2.4)(e) of the Income Tax Act. In particular, you are concerned with the application of this provision where loans are made by private companies to senior employees to enable them to acquire shares from the controlling shareholders.
As requested, we have considered your questions and have provided some comments below. However, we cannot confirm the tax implications of particular transactions unless 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. Thus, our comments are of a general nature only.
In your letter, you provided the following example. A closely-held private corporation will provide a loan to an arm's length employee to enable that employee to acquire shares of the corporation. The loan will be made at the direction of, or with the concurrence of, the controlling shareholder(s), and will be used to fund the acquisition of shares belonging to such shareholder(s). The loan is motivated by the employment relationship, for example, management wishes to tie a senior employee's compensation to company performance or management wants to help ensure a senior employee's continued employment with them. You wonder whether the loan will be considered to have been received because of the shareholding of the controlling shareholder(s).
Unless one of the exceptions in subsection 15(2.4) of the Act apply, the amount of a shareholder 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 pursuant to subsection 15(2). Paragraph 15(2.4)(a) of the Act provides an exception for a loan or an indebtedness in respect of an employee who is not a "specified employee" of the corporation, if the loan also meets the conditions set out in paragraphs 15(2.4)(e) and (f). As a result of paragraph 15(2.4)(e), a loan will not be exempt under paragraph 15(2.4)(a) unless "it is reasonable to conclude that the employee or the employee's spouse or common-law partner received the loan, or became indebted, because of the employee's employment and not because of any person's shareholdings."
You are concerned that we would consider a loan, in the circumstances you described, as being received by the employee "because of any person's shareholdings." Whether or not a loan made by a corporation to an employee will be considered to be received by the employee because of the employee's employment, and not because of any person's shareholdings, is a question of fact. However, if a loan is made at the direction of a controlling shareholder to enable an employee to buy shares from such a shareholder, our general view is that the employee received the loan "because of any person's shareholding".
We trust that these comments will be of assistance.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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