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 the exemption in subsection 15(2.3) applies in the hypothetical situation described. Whether the corporation made a loan in the ordinary course of its ordinary business of lending money. Whether bona fide arrangements for repayment are made at the time the loan was made.
Position: Question of Fact. General comments provided.
Reasons: The issue of whether subsection 15(2.3) of the Act applies in any particular case is ultimately a question of fact.
XXXXXXXXXX 2003-004789
Luisa A. Majerus
January 23, 2004
Dear XXXXXXXXXX:
Re: Application of subsection 15(2.3)
This is in reply to your letter of November 7, 2003 concerning the application of subsection 15(2.3) of the Income Tax Act (the "Act"). Specifically, you have requested our views on the determination of whether a corporation is making loans as a lender in the ordinary course of its ordinary business of lending money.
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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Where a person (other than a corporation resident in Canada) is a shareholder of a corporation and becomes indebted to that particular corporation or a related corporation, the amount of the indebtedness is included in the shareholder's income by virtue of subsection 15(2) of the Act. Where the shareholder is a non-resident, paragraph 214(3)(a) of the Act deems the amount to be a dividend and the lending corporation must withhold and remit non-resident withholding tax.
Subsection 15(2) will not apply if the exception in subsection 15(2.3) applies. Subsection 15(2.3) applies where the debt arose in the ordinary course of the creditor's business or a loan was made in the ordinary course of the lender's ordinary business of lending money. In addition, at the time the indebtedness arose or the loan was made, bona fide arrangements for repayment within a reasonable time must have been made.
It is a question of fact whether a loan is made in the ordinary course of the lender's ordinary business of lending money. The word "ordinary" is not defined in the Act. The Canadian Oxford Dictionary defines ordinary as "regular, normal, customary or usual". In the case of Loman Warehousing Ltd v. the Queen (99 DTC 1113) the word "ordinary" is said to imply that the "business of lending money be one of the ways in which the company as an ordinary part of its business operations earns its income. It also implies that the lending of money be identifiable as a business." It is a question of fact whether the lending operations in a corporation can be identified as a business unto itself. Furthermore, a company may ordinarily carry on a money-lending business in addition to another business.
The Agency considers the following elements, while not exhaustive, to be indicative of a money-lending business:
1) The income earned from the lending of money is an integral part of the taxpayer's business;
2) The taxpayer's intention is to earn income from direct interest payments rather than through the enhancement of the value of the investment;
3) The taxpayer is able to establish a systematic and continuous pattern of lending money; and
4) The monies borrowed do not increase the capital of the borrower such as advances of working capital or payments in respect of guarantees.
Subsection 15(2.3) will apply where the amount is a loan, the lender earns all or part of its income through the ordinary business of lending money, the loan is made in the ordinary course of that money-lending business and at the time the loan was made bona fide arrangements for repayment within a reasonable time are made.
We trust these comments will be helpful.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
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