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 running shareholder loan account meets the exception in subsection 15(2.6) of the Act, if within 180 days after the end of the corporation's fiscal year-end it is cleared with the credit of bonuses payable at the end of the fiscal year end?
Reasons: Bona fide repayments to a shareholder loan account resulting from the payment of dividends, salaries, or bonuses, are not part of a series of loans or other transactions and repayments.
Randy Hewlett, B.Comm.
June 26, 2003
Re: Shareholder Loan Account
We are writing in response to your letter of May 7, 2003, wherein you asked for a technical interpretation on the application of subsection 15(2) of the Income Tax Act (the Act). We also acknowledge the additional information provided in your telephone conversation with Mr. Randy Hewlett on June 16, 2003.
You have described a situation in which a shareholder of a corporation has a "running loan account" that is in a debit balance at the fiscal year-end of the corporation. The loan balance is derived from personal drawings that were made by the shareholder and personal expenses that were paid by the corporation. At the end of the corporation's fiscal year-end, a bonus is declared in the shareholder's name. The corporation expenses the amount of the bonus in the fiscal year in which it was declared, but does not pay the net amount to the shareholder after source deductions until 180 days after the end of fiscal year in which the expense was incurred. The net amount of the bonus due to the shareholder is credited to the loan account and is equal to the debit balance. You have inquired whether the shareholder's loan balance at the end of the corporation's fiscal year-end would be considered "repaid within one year" and therefore, not required to be included in income.
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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following comments.
Interpretation Bulletin IT-119R4, Debts of Shareholders and Certain Persons Connected With Shareholders, discusses the tax implications under subsection 15(2) of the Act for shareholder loans. As noted in paragraph 24 of the bulletin, subsection 15(2.6) of the Act provides that where a loan which is repaid within one year from the end of the taxation year of the lender in which it was made and the repayment is not part of a series of loans or other transactions and repayments, it is not required to be included in the income of the borrower under subsection 15(2). Whether or not a repayment of a loan is part of a series of loans or other transactions and repayments is a question of fact. However, as noted in paragraph 29 of the bulletin, bona fide repayments to a shareholder loan account resulting from the payment of dividends, salaries, or bonuses, are not part of a series of loans or other transactions and repayments. As a result, it is our view that the loan described in your situation meets the exception in paragraph 15(2.6) of the Act and is not required to be included in the shareholder's income under subsection 15(2).
You should note, however, that an interest benefit based on the period of time that the loan was outstanding would be included in the shareholder's income pursuant to subsection 80.4(2) of the Act. For more information on the calculation of shareholder benefits under subsection 80.4(2) of the Act, see Interpretation Bulletin IT-421R2, Benefits to Individuals, Corporations and Shareholders from Loans or Debt.
We trust our comments will be of assistance to you.
John Oulton, CA
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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