25 August 1993 External T.I. 9307045 F - Extension of the Repayment of S/H Loan

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.

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Dear Sir:

RE:  Shareholder Loans

We are replying to your letter of March 4, 1993 concerning the application of subsection 15(2) of the Income Tax Act (the Act) where a change of control of the lending corporation occurs before the date upon which a loan to the shareholder comes due. We apologize for the delay in our response.

You describe a situation in which a loan has been made to the sole shareholder (the debtor) of a corporation in circumstances where it was expected that subsection 15(2) of the Act would not apply because of the exception in paragraph 15(2)(b). Within the first taxation year following that in which the loan was made, the debtor sells all the shares of the corporation to a purchaser with whom the debtor deals at arm's length and as part of the consideration for the sale of the shares, the debtor is given an additional two months in which to repay the outstanding shareholder loan. As a result of the extension, the loan will not be paid within the original expected repayment schedule and so the conditions described in paragraph 15(2)(b) of the Act will not apply even if the corporation's fiscal year was not shortened by reason of the change in control of the corporation.

You ask whether the change in year end created as a result of the deeming provisions of subsection 249(4) of the Act accelerates the date before which the loan must be repaid in order to avoid the application of subsection 15(2) of the Act. Secondly, you ask if the time limit in subsection 15(2) of the Act will still be applicable since the debtor will no longer be a shareholder at the time the loan is repaid.

It is a question of fact as to whether subsection 15(2) of the Act applies in any particular situation and, as such, we cannot provide a definitive reply without a review of all the relevant facts and circumstances of a particular situation. Nevertheless, we offer the following general comments on the assumption that a corporation makes the loan to the individual in his capacity as a shareholder, the loan is not described as any of the exceptions in paragraph 15(2)(a) of the Act, and that the amount of the repayment does not constitute a "part of a series of loans or other transactions and repayments" for the purposes of paragraph 15(2)(b) of the Act.

Paragraph 15(2)(b) of the Act provides an exception for the income inclusion which would otherwise occur where a loan (or other indebtedness) is made to a shareholder or a person connected with the shareholder if, among other requirements, the loan or indebtedness is repaid within one year from the end of the creditor's taxation year in which the loan or indebtedness was made or incurred.

While the expression "taxation year" is defined in subsection 249(1) of the Act, the word "year" is not. The word "year" is, however, defined in section 37 of the Interpretation Act to mean "any period of twelve consecutive months ..." and this definition of "year" is applicable for the purposes of the Act. Therefore, the time limit referred to in paragraph 15(2)(b) of the Act within which the loan or indebtedness must be repaid is the period of twelve consecutive months beginning with the end of the taxation year, as defined in subsection 249(1) of the Act, of the lender or creditor during which the loan was made or the debt was incurred. Thus, where an amount was loaned to a shareholder, the amount of the loan will not be required to be included in that shareholder's income for the year in which the loan was made unless it is still outstanding 12 months after the end of the creditor's taxation year in which the loan was made even if the subsequent taxation year of the lender or creditor ends prior that date.

With respect to your second question, it is our view that the relevant time for determining whether the debtor is a shareholder or connected with a shareholder for the purpose of determining whether subsection 15(2) of the Act will apply is the time at which the loan is made even though the debtor may cease to be a shareholder before the loan is repaid.

Please note that the above comments represent our general views with respect to the subject matter of your letter. The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 30, 1991 and special release thereto, are not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch