5 October 1992 Income Tax Severed Letter 9219115 - Exempt Shareholder Loans

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.

5-921911
24(1) A.M. Brake
(613) 957-2133

Attention: 19(1)

October 5, 1992

Dear Sirs:

Re: Paragraph 15(2)(b)

This is in reply to your letter of June 16, 1992 requesting an interpretation of paragraph 15(2)(b) of the Income Tax Act (the "Act") in the situation which you have described. The relevant facts include the following:

• 1. Xco is a corporation incorporated in and resident the United States. It owns 100% of the shares of Yco, a corporation incorporated in and resident in Canada.
• 2. Yco is in the manufacturing business and regularly purchases items from and sells items to Xco in the ordinary course of its business. This results in a trade account payable to/receivable from Xco at any given time. Other than this, Yco has no history of loaning funds to Xco or otherwise being owed funds by Xco.

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• 3. In early 1992 Yco loaned $A,ooo to Xco evidenced by a promissory note bearing interest at the rate prescribed for purposes of subsection 80.4(2) of the Act, and is due December of 1993. Yco's year end is December 31. Yco proposes to make further loans to Xco during 1992 and perhaps 1993. These further loans will each be evidenced by a promissory note, will each bear the same rate of interest and will each be due in December 1993. The purpose of the loans is to assist Xco in meeting certain financial obligations. It is anticipated that further loans will not be required after 1993.

Our comments

In considering whether the exemption provided in paragraph 15(2)(b) is applicable in the foregoing situation, we will assume that the loans have been repaid by December 31, 1993 and that there are no 1994 transactions. Since the 1992 loans have been repaid within the time frame provided in the aforementioned paragraph and the 1993 loans have been repaid prior to the end of the specified period, the exemption is applicable. If, however, there are new loans made in early 1994, it will be necessary to determine whether they would be considered to be a part of a series of loans and repayments. This would be a determination to be made based on the facts of a given situation subsequent to the transactions having been completed.

It is acceptable to have a repayment of an older loan and to make a new loan in the same year around the same time if the facts support the transactions. Given a situation where an earlier loan is made for a specific purpose, say to purchase equipment, and is to be repaid on or before a given date and subsequently another loan is made for a specific purpose, say to purchase land, around the date the earlier loan is repaid, we would accept this as being a repayment of an earlier loan and a new loan having been made, rather than insisting that it is part of a series of loans and repayments. On the other hand, if there are numerous non-specific loans and non-specific payments, it would be considered as being part of a series of loans and repayments, in which case the increases in a particular year-end balance would be treated as a loan in that year and a decrease in a year-end balance would be treated as a repayment.

During our telephone conversation (Brake/19(1)) we discussed declaring a dividend and crediting it against a loan. It is the Department's long standing practice not to regard an offset of a shareholder's loan account debit balance against a dividend payable as part of a series of loans and repayments for purposes of paragraph 15(2)(b) of the Act. For purposes of paragraphs 82(1)(a) and 12(1)(j) of the Act the offset of the dividend payable would constitute payment by the corporation and receipt by the shareholder of the dividend. As the shareholder would be required to

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include the dividend in computing income for the year, the offset could not be considered a part of a series of loans and repayments for purposes of paragraph 15(2)(b) of the Act. In case of a non-resident shareholder, subsection 212(2) would have application.

We trust our comments are of assistance.

Yours truly,

E. Wheeler
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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