6 April 1992 Income Tax Severed Letter 9201365 - Shareholder Benefits

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: SHAREHOLDER BENEFITS SECTION: 15(1), 15(2)]

920136
XXX M.P. Sarazin
(613) 957-2118
Attention: XXX
April 6, 1992
Dear Sirs:

Re: Subsection 15(1) - Interest-Free Intercompany Loans

This is in reply to your letter dated January 2, 1992 wherein you requested clarification of the Department's administrative policy, as expressed in the response to Round Table Question 51 presented to the 1981 Conference of the Canadian Tax Foundation, regarding the application of subsection 15(1) of the Income Tax Act (Canada) (the "Act") to the following hypothetical situation.

A Canadian subsidiary sells its business assets to its Canadian parent and receives as consideration a non-interest bearing note receivable. The parent subsequently carries on the business of the subsidiary. The subsidiary retains only its land and buildings which it subsequently leases to the parent, creating rental income.

You would like to know whether or not the subsidiary would still be considered to be carrying on its business in the above situation and, if so, would the Department's administrative policy continue to apply to restrict the imputation of interest pursuant to subsection 15(1) of the Act.

In circumstances where a corporation sells its business assets to its corporate shareholder we would generally not consider the loan to have arisen in the course of carrying on the businesses of the two corporations.

We are also of the view that where a bona fide loan or other indebtedness, such as a balance of purchase price payable does, in fact, exist the provisions of subsection 15(1) of the Act would not generally apply to include a benefit in the shareholder's income. Generally, any benefit arising in respect of a genuine interest-free debt will be due to the fact that interest is not charged on the indebtedness. Subsection 15(1) will not generally apply to impute an interest benefit in the parent's hands since interest on shareholder debt is imputed under the provisions of subsection 80.4(2) of the Act, which does not apply in respect of indebtedness owing by a corporate shareholder resident in Canada.

The foregoing comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may lead to different conclusions. The foregoing opinions are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental Affairs Branch