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 bona fide loan constitutes a payment or transfer of property for the purposes of subsection 56(2) of the Act?
Position: No, except in certain circumstances.
Reasons: In accordance with the Act, case law and previous positions.
February 27, 2014
RE: Potential Application of Subsection 56(2) in the Context of a Bona Fide Loan from a Partnership to an Individual
We are writing in response to your query of September 24, 2013 requesting our comments on whether a bona fide loan described in the following hypothetical situation can constitute a "payment or a transfer of property" for the purposes of subsection 56(2) of the Income Tax Act (the "Act").
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or a subparagraph is a reference to the relevant provision of the Act.
Facts and Assumptions
Our understanding of the facts and assumptions contemplated in your hypothetical situation are as follows:
1. The taxpayer ("Taxpayer"), an individual, holds 100% of the issued and outstanding common shares of the capital stock of a taxable Canadian corporation, Holdco1.
2. Another individual, who is at arm's length with the taxpayer, holds 100% of the issued and outstanding common shares of the capital stock of a taxable Canadian corporation, Holdco2.
3. Holdco1 (the limited partner) holds 99.9% of the issued and outstanding partnership units of a partnership ("Partnership") and Holdco2 (the general partner) holds the remaining 0.1% of the issued and outstanding partnership units of Partnership.
4. Partnership utilizes some excess funds available to provide a $2 million bona fide loan to Taxpayer. The loan will not bear interest, will be due on demand and will not be forgiven.
You ask whether the bona fide loan from Partnership to Taxpayer will constitute a "payment or transfer of property" for the purposes of subsection 56(2).
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Where subsection 56(2) applies, a payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to another person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person, with certain exceptions, shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to the taxpayer.
With respect to your specific question that relates to subsection 56(2), jurisprudence has established that subsection 56(2) will not generally be applicable in a situation involving a bone fide loan between persons because such a loan does not constitute a "payment of transfer of property" within the meaning of that subsection. Whether a bone fide loan has been made in a particular situation is a mixed question of law and fact. For example, the CRA is of the opinion that if, when the loan is made by a lender, it is apparent that the borrower will not be able to repay the loan and/or provide reasonable security for repayment, the lender would have transferred property (cash) without having received sufficient consideration. By doing so, there would be a decrease in the value of the lender and the provisions of subsection 56(2) may apply depending on the circumstances. Furthermore, if the loan is forgiven by the lender at a given time, the advance of funds may become a "payment or transfer of property" subject to subsection 56(2) at the time of the forgiveness of the loan.
In the context of this hypothetical situation, we do not have sufficient information in respect of, among other things, the terms and conditions of the loan agreement to provide further comments with respect to the potential application of subsection 56(2). You can refer to our Interpretation Bulletin IT-335R2 "Indirect Payments" ("IT-335R2") and Document No. 2005-0140961C6 for additional general comments. (footnote 1)
You may, however, wish to consider the potential application of subsection 15(2) to your hypothetical situation. Specifically, subsection 15(2) applies where, subject to certain exceptions provided for in subsections 15(2.2) to 15(2.6), a person (Taxpayer) is a shareholder of a particular corporation (Holdco1) and the person (Taxpayer) has in a taxation year received a loan from or become indebted to (otherwise than by way of a pertinent loan or indebtedness) a partnership (Partnership) of which the particular corporation (Holdco1) is a member. If subsection 15(2) applies, the amount of the loan or indebtedness is included in computing the income for the year of the person (Taxpayer).
Therefore, subsection 15(2) appears to be applicable to your hypothetical situation, subject to the exceptions outlined in subsections 15(2.2) to 15(2.6), such that the amount of the loan or indebtedness would be included in computing the income for the year of Taxpayer.
We trust our comments will be of assistance.
Stéphane Prud'Homme, LL.B, M. Fisc.
for Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Note that IT-335R2 continues to reflect the position of the CRA and is only considered "Archived" on the CRA website as noted in your query, in accordance with the Government of Canada Web standards for purposes of identifying "Archived Content" that will not be altered or updated. On August 1, 2013, a standardized Treasury Board of Canada Secretariat "Archived Content" notice was added to all interpretation bulletins (ITs) on the CRA website. The notice has no effect on the status or reliability of the ITs. They are current up to the effective date stated in each publication. Each IT will be cancelled when it is replaced by an income tax folio.
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