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: Would the lending of funds from a corporation to a shareholder's child to pay down the child's home mortgage be taxable to the child?
Position: likely yes
Reasons: The exceptions discussed in the provisions of subsections 15(2.2) to (2.6) of the Act appear likely to not apply and the daughter/son-in-law is connected with a shareholder of the corporation; therefore, the daughter/son-in-law would be required to include the amount of the loan in income for that year under subsection 15(2) of the Act.
XXXXXXXXXX 2002-012639
Shaun Harkin, CMA
May 24, 2002
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Loan From Corporation
This is in reply to your letter of February 22, 2002 wherein you asked whether a loan from a corporation that you and your spouse control (hereinafter referred to as "Lendco") to your daughter or son-in-law would be taxable to your daughter or son-in-law when the following conditions exist:
(a) the loan would be for the purpose of paying down the daughter's/son-in-law's existing home mortgage;
(b) an interest rate of 4.5% would be charged on the loan and be paid at the end of each year; and
(c) the principle would be paid either on demand (should Lendco need the money) or with payments commencing in five years from the date of the loan.
Written confirmation of the consequences inherent in particular transactions are 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. If, however, the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
A person connected (as defined in subsection 15(2.1) of the Income Tax Act (the "Act")) with a shareholder of a particular corporation, that has in a taxation year received a loan from the particular corporation will be required to include the amount of the loan in income for that year under subsection 15(2) of the Act, unless the loan comes within the exceptions discussed in the provisions of subsections 15(2.2) to (2.6) of the Act. 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.
The only exception to the application of subsection 15(2) of the Act that may apply to your situation is subsection 15(2.3) of the Act which states:
"Subsection (2) does not apply to a debt that arose in the ordinary course of the creditor's business or 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".
The issue of whether subsection 15(2.3) of the Act applies in any particular case is ultimately a question of fact. The Canada Customs and Revenue Agency's position on whether a taxpayer's business includes the lending of money is summarized in paragraph 11 of Interpretation Bulletin 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 Lendco is. However, in the situation described, it is our view that:
- based on the information provided we could not conclude that Lendco's ordinary business includes the lending of money,
- your daughter and son-in-law would be connected with a shareholder of Lendco, and
- none of the exceptions discussed in the provisions of subsections 15(2.2) to (2.6) of the Act appear to be met.
As a result, subsection 15(2) of the Act would likely apply to the proposed loan and your daughter or son-in-law would be required to include the amount of the loan in income in the year the loan is received.
We have enclosed a copy of Interpretation Bulletin IT-119R4, Debts of Shareholders and Certain Persons Connected With Shareholders, for your information.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.
We trust the above comments are of assistance.
Yours truly,
Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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