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: (1) Whether a shareholder loan repaid by the Estate of that shareholder within one year after the end of the taxation year of the creditor in which the loan was made should be included in computing the shareholder's income under subsection 15(2); (2) Whether the Estate can claim a deduction pursuant to paragraph 20(1)(j) where the amount of the loan that was included in computing the deceased shareholder's income under subsection 15(2) is repaid.
Position: (1) Yes (2) Yes
Reasons: (1) Subsection 15(2.6) applies to deny the application of subsection 15(2) irrespective of whether the loan is repaid by the shareholder or the estate for the deceased shareholder. (2) The deduction found in paragraph 20(1)(j) can be claimed in accordance with CRA's administrative views stated in IT-119R4.
STEP CRA ROUNDTABLE June 2012
It is common in dealing with an owner-manager business to see a shareholder draw money from the corporation during the year, and repay the amount at the corporation's year end, or within one taxation year, often by the offset of an amount credited to the shareholder from payment of a dividend or a bonus (net of withholding tax). In such circumstances, section 80.4 would impute a benefit to the shareholder if the advance was interest-free, but otherwise there would not be any income inclusion to the shareholder. If the loan is outstanding beyond one taxation year from the end of the taxation year in which the loan was made, then the amount of the loan is included in income of the shareholder (in the year that the loan was made) and a deduction is given when the loan is repaid.
Our questions concern the circumstance where a shareholder loan is outstanding, and the shareholder dies before the loan is repaid.
1) Where the legal representative ("Estate") pays back the loan to the corporation, within the time frame permitted such that no income inclusion would arise had the shareholder repaid the loan, does CRA agree that the amount of the loan would not be included in the income of the shareholder?
Subsection 15(2.6) provides that the amount of the loan received in a taxation year by a person who is a shareholder of a particular corporation will not have to be included in computing the income of the person for that year under subsection 15(2) if the loan is repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made where it is established that the repayment was not part of a series of loans and repayments.
Provided that the repayment was not part of a series of loans and repayments, the repayment of the loan within a period of one year after the end of the taxation year of the creditor in which the loan was made will prevent the application of subsection 15(2) irrespective of whether the loan is repaid prior to the person's death or by the Estate after the person's death.
2) Where the loan is not repaid within the required time frame, and the amount is included in the income of the shareholder, if the Estate repays the loan, will a deduction be granted either to the shareholder or to the Estate?
Paragraph 32 of Interpretation Bulletin IT-119R4 provides that the Estate can claim the deduction under paragraph 20(1)(j) in the year a repayment is made to the extent that the deceased person had included the amount of the loan in computing his or her income pursuant to subsection 15(2) in a preceding taxation year.
You should note, however, that the CRA has indicated in technical interpretation 9918015 that the position in paragraph 32 of IT-119R4 does not apply where the loan is subsequently repaid by a beneficiary of the Estate.
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