30 March 2012 Internal T.I. 2012-0439931I7 - Section 404 of ITR Meaning of "loans"

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: What is the meaning of "loans" for the purposes of Section 404 of the Income Tax Regulations?

Position: An amount is a loan for the purposes of Section 404 of the Income Tax Regulations if there is a lender-borrower relationship between the bank and the borrower.

Reasons: Jurisprudence.

									March 30, 2012

Legislative Policy Directorate				Income Tax Rulings
Legislative Policy and Regulatory Affairs Branch	  Directorate
20th Floor, Rm 20-01						John Parker CMA
Place de Ville, Tower A						(613) 957-8284

									2012-043993
Attention: Robin Maley, Manager 

Section 404 of the Income Tax Regulations – meaning of “loans”

We are writing in response to your correspondence dated March 15, 2012 wherein you requested our views on the meaning of the word “loans” in subsection 404(1) of the Income Tax Regulations (the “Regulations”). You have asked whether we agree with your view that an amount is a loan, for the purposes of Section 404 of the Income Tax Regulations (the “ITRs”), only if there is a lender-borrower relationship between the bank and the debtor.

Our Comments

Legislation

• Subsection 404(1) of the Regulations entitled “Banks” states:

“Notwithstanding subsections 402(3) and (4), the amount of taxable income that is deemed to have been earned by a bank in a taxation year in a province is which it had a permanent establishment is 1/3 of the total of

(a) that portion of its taxable income for the year that the aggregate of the salaries and wages paid in the year by the bank to employees of its permanent establishment in the province is of the aggregate of all salaries and wages paid in the year by the bank;
and

(b) twice that proportion of its taxable income for the year that the aggregate amount of loans and deposits of its permanent establishment in the province for the year is of the aggregate amount of all loans and deposits of the bank for the year.”

• The term “loans” is not defined in the Income Tax Act (the “Act”).
• The definition of “lending asset” in subsection 248(1) of the Act states: “lending asset” means a bond, debenture, mortgage, hypothecary claim, note, agreement of sale, or any other indebtedness or a prescribed share, but does not include a prescribed property:”
• Subsection 488(3) of the Bank Act (“BA”) entitled “Meaning of loan” states: “For the purposes of this Part, “loan” includes a deposit, a financial lease, a conditional sales contract, a repurchase agreement and any similar arrangement for obtaining funds or credit, but does not include investments in securities or the making of an acceptance, endorsement or other guarantee.”
• OSFI Draft Guideline No. E-6 dated August 2008, Page 3, Para. 6 (c) states: “Loan” has the same meaning as defined in subsection 488(3) of the BA...”

Jurisprudence

• In the Tax Court of Canada decision in Bradley v. The Queen, 96 DTC 2040 Justice Morgan stated:

“In law, a loan has been defined as follows:

A “loan” is a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent to that which he borrows,

A “loan” within the law of usury is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount with or with or without an additional sum agreed upon for its use.

To constitute a “loan”, there must be an express or implied agreement whereby one person advances money to another, who agrees to repay it on such terms as to time and rate of interest, or without interest, as parties may agree.

Words and Phrases, Permanent Edition, Volume 25A, Page 79.”

• In the Tax Court of Canada decision T.E. McCool Ltd. v. MNR, 3 DTC 1202, Justice Cameron stated:

“In my opinion, if there is to be borrowed capital, the taxpayer would have to be in the position of a borrower and some other party would have to be a lender.”

• In the Supreme Court of Canada decision MNR v. T.E. McCool Ltd., 49 DTC 700, the court confirmed:

“Terms such as “borrowed capital”, “borrowed money” in tax legislation have been interpreted to mean capital or money borrowed with a relationship of lender and borrower between the parties.”

Past Rulings Opinions

• Income Tax Rulings document F2011-0414111I7 dated January 13, 2012 states:

“For a loan to exist there must be a lender/borrower relationship between parties.”

Conclusion

Based on our review of the legislation, jurisprudence and past Income Tax Rulings documents, we agree with your view that an amount is a loan, for the purposes of Section 404 of the ITRs, only if, there is a lender-borrower relationship between the bank and the debtor. There is significant jurisprudence, including a decision at the Supreme Court of Canada, which define the meaning of “loan” for Income Tax purposes. The courts have consistently found that in order for an amount to be a “loan” there has to be a lender and borrower relationship between the taxpayers. This definition is board enough to include most banking loan arrangements for the purposes of Section 404 of the ITRs.

We trust our comments will be of assistance to you.

Yours truly;

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