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 Requirement To Pay could be issued to intercept an amount in respect of a shareholder loan payable to a shareholder indebted under the Act, if the loan has no repayment terms.
Position: Yes.
Reasons: Funds deposited in a corporation’s bank account are construed to be funds belonging to the corporation. In a debtor-creditor relationship, repayment terms of a loan do not have to be expressly stated. The application of subsection 224(1) does not hinge on any formal demand for payment of such a loan.
April 24, 2012
Thunder Bay Tax Services Office HEADQUARTERS
Income Tax Rulings
Directorate
Attention: Sid Sveinson Lindsay Frank
Revenue Collections Section (613) 957-2097
2012-044114
Effect of A Requirement To Pay on Shareholder Loan
We are replying to your inquiry of March 23, 2012. At issue, is whether the Minister may issue a Requirement To Pay, under subsection 224(1) of the Income Tax Act (the “Act”), to intercept an amount payable to a tax debtor in respect of a shareholder loan, where the loan does not have any fixed repayment terms.
In your example, the tax debtor is the sole shareholder of a corporation. He does not have a personal bank account, and uses, instead, the corporation’s bank account to effect his personal financial transactions. The financial statements, filed with the most recent corporate returns, recognise the shareholder loan as an amount payable. The notes to the financial statements disclose that the loan is non-interest bearing, with no fixed repayment terms. As explained below, the absence of any repayment terms on such a loan is no bar to the application of subsection 224(1) of the Act.
For a Requirement To Pay to be issued, the Minister has to know or suspect that a person is, or will be, liable, within one year, to make a payment to a tax debtor. Further, the amount of the payment must be payable immediately, or in the future. If these conditions are satisfied, the Minister may, in writing, require that person to pay to the Receiver General an amount on account of the tax debtor’s liability under the Act. A person who fails to comply with a Requirement To Pay may be assessed pursuant to subsection 224(4).
The facts in the instant case are somewhat analogous to those in 3087-8847 Québec Inc. v. The Queen, [2007] 5 C.T.C. 2313, 2007 D.T.C.1064 (T.C.C.). In that case, the shareholder, indebted for amounts under the Act, had deposited in, and withdrawn from, a bank account originally opened in the corporation’s name. The funds in the account were used to pay his own business as well as personal expenses. The amount in the account was disclosed on the financial statements as a shareholder loan payable to the shareholder.
A Requirement To Pay, issued to the corporation, was not honoured, and the corporation was assessed under subsection 224(4). On appeal, the corporation argued that section 224 did not apply, since it never loaned, advanced, or paid any sum to the shareholder, as the moneys in the bank account belonged from the outset to the shareholder. Further, the shareholder’s loan was not payable when the Requirement To Pay was issued, as the shareholder had not requested payment
In dismissing the appeal, the Court provided several reasons. It agreed with the Minister that since the funds were deposited in the corporation’s bank account, as far as third parties were concerned, such funds belonged to the corporation and, on that basis, they should have been remitted to the Receiver General as required by the Requirement To Pay. In addition, it held that in a debtor-creditor relationship, the repayment terms of a loan do not have to be expressly stated. Moreover, the application of subsection 224(1) does not hinge on any formal demand for payment of such a loan. In view of this decision, it is open to the Minister to issue a Requirement To Pay in the instant case.
Meanwhile, should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number provided at the outset.
Terry Young CA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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