2 March 2012 Internal T.I. 2011-0422811I7 - Loan received in capacity as an employee

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 a director receives a loan in his capacity as an employee in the circumstances described.

Position: No

Reasons: The amount of the loan appears to be in excess of what would reasonably be loaned to a director in his capacity as an employee in these circumstances.

							March 2, 2012
	

 Eli Moad						Income Tax Rulings Directorate

 Charities Directorate				Andrea Boyle, CGA

Canada Revenue Agency
320 Queen Street 7th Floor

 Ottawa, ON   K1A 0L5
		

      						2011-042281

Capacity in Which Director Loans Received

I am replying to your email dated September 29, 2011 in which you asked for our views on whether amount received by a director would be considered to be received in his capacity as an employee in the circumstances described below. We apologise for the delay in our response.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("the Act").

THE FACT SITUATION

You have provided the following fact situation:

1. A foundation was incorporated in 1984 with no share capital.

2. The vast majority of the charitable donations contributed to the foundation were made by one director with a smaller portion of the donations made by companies related to or controlled by the director.

3. The foundation loaned approximately $XXXXXXXXXX to a holding company which is controlled XXXXXXXXXX % by the director of the foundation.

4. The foundation only granted loans to corporations controlled by the director.

5. The holding company that received the $XXXXXXXXXX loan advances funds to related corporations, all of which appear to be controlled directly or indirectly by the director.

6. Based on the above, it is reasonable to conclude that the director was the controlling mind behind the foundation.

7. The taxpayer's position is that the $XXXXXXXXXX loan is one to which subsection 80.4(1) would normally apply because the loan was given to him by virtue of his office.

8. However the holding company is also making the representation that subsection 80.4(1) would not apply because at the time the loan was received the rate of interest was equal to or greater than the rate that would have applied in an arm's length transaction as provided for in subsection 80.4(1).

9. Subsection 189(1) would apply if the loan is received by virtue of shareholdings, but would not apply if the loan was made virtue of office or employment.

YOUR QUESTION

You have asked whether in the circumstances described the director received the loan because of, or as a consequence of, his current office such that subsection 80.4(1) would apply.

OUR COMMENTS

Non-Qualified Investment

Under the definitions in 149.1(1) a "non-qualified investment" of a private foundation includes, among other things, a debt owing to the foundation by a corporation controlled by a person who is a director of the foundation. From the fact situation described it seems that these loans would meet the definition of non-qualifying investments.

Subsection 189(1) provides for a tax on non-qualified investments. Under this subsection, where at any particular time in a taxation year a debt (other than a debt in respect of which subsection 80.4(1) applies or would apply but for subsection 80.4(3)) is owing by a taxpayer (in this case the holding company) to a private foundation and, at that time, the debt was a non-qualified investment of the foundation, the taxpayer (i.e. the holding company) shall pay a tax under Part I for the year equal to the amount specified in 189(1).

Subsection 80.4(1) Exemption for Loans to Employees

Generally several factors have been looked at to distinguish between a benefit received in the capacity as a shareholder versus a benefit received in the capacity as an officer or employee. These factors include: the degree of control exerted by the taxpayer over the decision-making process; the benefits received by the taxpayer when compared to other employees or officers i.e. the availability of the benefit to other officers or employees; and the importance to the corporation/foundation of the services provided by the taxpayer.

In our view, the amount of the loan received by the individual's corporations appears to be in excess of what is, or would likely be, loaned to the other directors by virtue of their office. It also seems unlikely that the importance of the services provided by the director would justify the provision of the loans of $XXXXXXXXXX . Therefore, in the circumstances described, it seems unlikely that the debt in question would be a debt to which section 80.4 would apply.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria 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 foundation 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. You should make requests for this latter version to Mrs. Céline Charbonneau at (613) 957-2137. A copy will be sent to you for delivery to the foundation.

We trust that these comments will be of assistance.

Yours truly,

Doug Watson.
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch