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: Are non-interest bearing loans made to related persons personal-use property?
Position: No.
Reasons: Personal-use property requires actual use or enjoyment. Absence of income earning purpose is insufficient.
XXXXXXXXXX
2013-051336
Whitney Dunn
December 10, 2013
Dear XXXXXXXXXX:
Re: Non-interest bearing loans and personal-use property
We are writing in response to your email of November 25, 2013 where you asked for our view whether either of the following non-interest bearing loans would be considered "personal-use property" ("PUP") as that term is defined in section 54 of the Income Tax Act (the "Act"):
1) a $100,001 non-interest bearing loan (represented by a note) made by a Canadian resident to a non-resident corporation that is not a foreign affiliate; and
2) a non-interest bearing loan of more than $100,000 made by a Canadian resident parent to a non-resident child.
Your concern with these two loans relates to the reporting rules for "specified foreign property" in section 233.3 of the Act and Form T1135, "Foreign Income Verification Statement". The definition of "specified foreign property" in subsection 233.3(1) of the Act includes a debt owing to a resident from a non-resident; however, PUP is specifically excluded from that definition.
Our comments:
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer 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".
The relevant parts of the definition of PUP in section 54 of the Act are as follows:
(a) property owned by the taxpayer that is used primarily for the personal use or enjoyment of the taxpayer or for the personal use or enjoyment of one or more individuals each of whom is
(i) the taxpayer,
(ii) a person related to the taxpayer, or
(b) any debt owing to the taxpayer in respect of the disposition of property that was the taxpayer's personal-use property
The Tax Court has taken different views on what qualifies as PUP under paragraph (a). In Klotz v. The Queen, 2004 TCC 147, Justice Bowman held that PUP includes all properties except those used or held for an income-earning purpose. The decision was upheld without comment on that point.
In the more recent case of Plamondon v. The Queen, 2011 TCC 47, Justice Hogan disagreed with that expansive interpretation, stating "the property must unequivocally be for the use and enjoyment of the taxpayer. If Parliament had wanted there to be only two types of property, it could have defined PUP as all property that is not income property
However, that was not what Parliament did." In his view, for the property to be PUP, there must be "a primary use for a specific purpose".
The CRA has always considered that to qualify as PUP under paragraph (a) the property must be owned and actually used primarily for the personal use or enjoyment of the taxpayer or a related person. In our view, a debt is not normally used or enjoyed as contemplated by paragraph (a). A debt would normally only qualify as PUP under paragraph (b), which requires the debt result from the disposition of a property which itself was PUP.
Accordingly, in our view, a non-interest bearing loan could be PUP if it arose on the disposition of a personal-use property. The loans you have described do not appear to meet that criterion and accordingly are not PUP. Assuming the other criteria in section 233.3 are met, the taxpayer(s) would be required to report those loans on Form T1135.
We trust our comments will be of assistance.
Michael Cooke, C.P.A., C.A.
Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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