5 May 2005 External T.I. 2005-0116281E5 - Guarantee Fee Received

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: A husband and wife each own 50% of the common shares of a CCPC. It has a loan with a Canadian chartered bank that requires the shareholders to personally guarantee the loan. Once a year, the CCPC pays the shareholders a guarantee fee of 1% of the amount guaranteed. The shareholders have not guaranteed any other debt. 1. Whether the guarantee fee received would be considered employment or other income of the shareholders. 2. What are the reporting requirements for the corporation with respect to the guarantee fees paid?

Position: 1. Guarantee fees received by a shareholder from the corporation will generally be considered income with respect to services rendered. 2. The corporation is required to report the guarantee fees paid on a T4A slip.

Reasons: 1. Section 9. 2. Pursuant to section 200 of the Regulations, every person who makes a payment described in subsection 153(1) of the Act shall make an information return in prescribed form in respect of the payment. The payment of guarantee fees is included under paragraph 153(1)(g) of the Act.

XXXXXXXXXX 2005-011628
Kathryn McCarthy, CA
May 5, 2005

Dear XXXXXXXXXX:

Guarantee Fee Received

This is in reply to your letter dated February 10, 2005, concerning the above noted subject matter.

You described a husband and wife who each own 50% of the common shares of a Canadian controlled private corporation (CCPC) and are the only shareholders of the CCPC. It has a loan with a Canadian chartered bank that requires the shareholders to personally guarantee the loan. Once a year, the CCPC pays the shareholders a guarantee fee of 1% of the amount guaranteed. The shareholders have not guaranteed any other debt. You enquired as to whether the guarantee fee received would be considered employment or other income of the shareholders. Further, you enquired as to the reporting requirements for the corporation under the Income Tax Act (the Act) with respect to the guarantee fees paid.

Our Comments

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. We are, however, prepared to offer the following general comments.

In the above scenario the question arises as to whether the individual shareholders, who are also employees, are personally guaranteeing the corporate debts in their capacity as shareholders or employees. Since the shareholders are providing the guarantee in a closely held corporation, it is likely that this is being done because of their shareholdings rather than their employment. Accordingly, the guarantee fees received by these individuals would likely not be considered income from an office or employment. Guarantee fees received by a shareholder from the corporation will generally be considered income with respect to services rendered by virtue of section 9 of the Act.

Pursuant to section 200 of the Income Tax Regulations (the Regulations), every person who makes a payment described in subsection 153(1) of the Act shall make an information return in prescribed form in respect of the payment unless an information return in respect of the payment has been made under sections 202, 214, 237 or 238 of the Regulations. Paragraph 153(1)(g) of the Act includes the payment of fees, commissions or other amounts for services and the prescribed information return is the T4A Supplementary and Summary Form. In our view, the payment of guarantee fees is included under paragraph 153(1)(g) and is therefore required to be reported on a T4A slip. For further information on the payer's responsibilities with respect to issuing information returns see the RC4157, Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary Form - 2004, which is available on our website at http://www.cra-arc.gc.ca/E/pub/tg/rc4157/README.html.

We trust these comments are helpful.

Yours truly,

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