13 September 2004 External T.I. 2004-0085501E5 - Shareholder loan

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.

Principal Issues: Whether there is any consequence under 15(2) when corp loans money to buy dwelling

Position: Likely since the recipient would have received it because he/she is a shareholder-15(2.4)(e)

Reasons: Specific rule in 15(2.4) specifically denying exemption

XXXXXXXXXX 2004-008550

September 13, 2004

Dear XXXXXXXXXX:

This is in reply to your letter of July 13, 2004, concerning the income tax implications of certain investments being contemplated by one of your corporate clients.

Your question

You have a corporate client with excess cash and it wants to make "safe investments." You noted that term deposits offer low interest returns and investing in mutual funds and the stock market offers more risk than your client is prepared to take. You asked whether the corporation could invest in a registered mortgage payable by the shareholder or relative of the shareholder. The terms of the mortgage will be the same as they would be with an arm's length person. In this regard, you asked about the possible implications under subsection 15(2) and noted that the shareholder is also an employee.

Our comments

Subsection 15(2) of the Act will apply in the above scenario, since the shareholder or a person connected to the shareholder will become indebted to the corporation. Subsection 15(2.1) provides that a person is connected to the shareholder if he or she does not deal at arm's length with the shareholder.

Subsections 15(2.2) to (2.6) contain specific exceptions to the application of subsection 15(2). If a borrower can establish that a loan falls within one of these exceptions, the loan will not have to be included in income under subsection 15(2). Since the loan will be made to acquire a dwelling, consideration will have to be made as to whether the exemption in subsection 15(2.4) will apply. In this regard, it is likely that paragraph 15(2.4)(e) will preclude this exemption from applying since it seems that the employee will receive the loan, or became indebted, because of his or her shareholdings.

You may wish to refer to interpretation bulletin IT-119R4 for further explanations of the application of 15(2). In this regard, the bulletin can be found on our website at: http://www.cra-arc.gc.ca/E/pub/tp/it119r4/README.html.

We hope that these comments are helpful.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate