12 March 2007 Internal T.I. 2006-0215161I7 - Opening balance in shareholder loan account

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 the opening balance in a shareholder loan account in a particular year can be included in income under subsection 15(2) in that year.

Position: No.

Reasons: The opening balance in a particular year relates to a loan made in a previous taxation year(s) and thus an income inclusion, if applicable, must be made in the particular previous taxation(s)

 								March 12, 2007

	Appeals Division					HEADQUARTERS
	Toronto Centre TSO				J. Gibbons, CGA
(819) 458-3538
	Attention:  François Mathieu
								2006-021516
	Shareholder Loan Account

We are writing in response to your email dated November 20, 2006, regarding the above-noted issue. In particular, you wish to have our views about whether the opening balance of a running shareholder loan account in a particular taxation year (the "current year"), which was not included in income under subsection 15(2) of the Income Tax Act (the "Act") in previous years (the "previous years"), can be considered a loan received by the shareholder in the current year for purposes of applying subsection 15(2) in the current year. Presumably, the shareholder tax returns for the previous years are statute-barred.

Our views

According to the words of subsection 15(2) of the Act, where a person described in any of paragraphs (a) through (c) of that subsection (for the sake of simplicity, hereinafter referred to as a "shareholder")

"has in a taxation year received a loan or has become indebted to the particular corporation [ including a corporation of which the shareholder has shares] ... the amount of the loan or indebtedness is included in computing the income for the year [of the shareholder]."
[Emphasis added.]

In our view, the second reference to "year" in subsection 15(2) of the Act refers back to the taxation year in which the particular debt or loan is made or incurred, as the case may be. Accordingly, since the opening balance of a running shareholder loan account in a taxation year represents debts incurred and/or loans made in a previous years, subsection 15(2) of the Act could not be applied to include any of this amount in income in the current year. Instead, the shareholder loan accounts for the previous years would have to be reviewed to determine if subsection 15(2) could be applied to any of those years. If the previous years are now statute barred and not otherwise open for reassessment, there is no authority in the Act which would allow the CRA to tax under subsection 15(2) of the Act any loans or debts that arose in those years. If the opening balance of a shareholder loan account cannot be assessed in the current year under subsection 15(2) of the Act, you wish to know how such balance should be treated in the current year. In our view, the opening balance is relevant when determining the allocation of credits in the current year for purposes of applying subsection 15(2.6) of the Act. As indicated in paragraph 36 of IT-119R4, any credits to a shareholder loan account, assuming that they are bona fide repayments, are ordinarily allocated on a first-in first out ("FIFO") basis unless another allocation is requested by the shareholder. Obviously, in the case where the opening balance in a shareholder loan account consists of debts or loans that were incurred or made in statute barred years, the shareholder would benefit from the allocation of credits on a non-FIFO basis, such that, where possible, the credits would be allocated first to loans made or debts incurred in taxation years that are still open to reassessment. However, according to paragraph 27 of IT-119R4, which is supported by the Tax Review Board's decision in Edward C. Sargent v. MNR (83 DTC 572), the facts must clearly indicate that the taxpayer intended a different allocation.

It should also be noted that an opening balance in a shareholder loan account would result in the assessment of an interest benefit under subsection 80.4(2) of the Act in the hands of the shareholder based on the period of time that a loan was outstanding in the year. For more information on the calculation of shareholder benefits under this provision, see Interpretation Bulletin IT-421R2, Benefits to Individuals,Corporations and Shareholders from Loans or Debt.

For your information a copy of this memorandum will be severed using the criteria in the Access to Information Act and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the Taxpayer. Should the Taxpayer request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

If we can be of any further assistance, please feel free to contact the author at the above-noted number.

Yours truly,

Randy Hewlett
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch