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.
Principal Issues:
A corporation made a loan to its sole shareholder with respect to the acquisition of a dwelling. The loan is payable on demand and is interest bearing with the rate of interest based on current commercial rates. Monthly payments are based on a 25 year amortization period. with respect to subparagraph 15(2)(a)(ii), have bona fide arrangements for the repayment of the loan within a reasonable time been made?
Position TAKEN:
Since the issue involves a question of fact, a definitive response was not provided. However, an important factor is considered to be whether the loan was made in accord with normal commercial practice. In the above circumstances, this is not considered to be the case.
Reasons FOR POSITION TAKEN:
Since the interest rate is applicable for a 25 year time frame and the loan is not renewable, the loan is not considered to have been made in accordance with normal commercial practice.
940083
XXXXXXXXXX M. Eisner
May 20, 1994
Dear Sir:
Re: Loan to Purchase Residence - Shareholder
This is in reply to your letter that we received on January 13, 1994 in which you requested our comments on the tax consequences of a loan made by a corporation to an individual who is a shareholder.
The situation set out in your letter appears to relate to a specific taxpayer. Confirmation of the tax consequences of proposed transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R2 dated September 28, 1990 and the related Special Release dated September 30, 1992. On the other hand,if the transaction has already occurred, you may wish to submit the relevant facts and documentation to your local district taxation office. We are, however, providing you with the following general comments.
In the following comments, unless otherwise stated, all references are to the Income Tax Act 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the Act). You describe a situation where an individual owns 100 % of the outstanding shares of a corporation. The corporation proceeds to make a loan to the individual. The loan agreement contains no renewal term and is repayable on demand. Subject to the requirement concerning the repayment of the loan, such a loan satisfies the requirements set out in subparagraph 15(2)(a)(ii) of the Act. Based on commercial rates, interest is charged on the housing loan and the monthly repayments are based on a 25 year amortization period.
Whether bona fide arrangements were made at the time the housing loan was made, for repayment of that loan within a reasonable period of time, is a question of fact that can only be determined upon consideration of all the circumstances of a particular taxpayer's case. We are, therefore, unable to provide you with a definitive response as to whether the type of arrangement described above would be considered bona fide without taking into account the circumstances of the individual. However, in a given situation, one of the factors that the Department will consider is, as indicated in paragraph 12 of Interpretation Bulletin IT-119R3 "Debts of Shareholders, Certain Persons Connected with Shareholders etc." is the normal commercial practice that would prevail in a given situation. Our comments in this regard are set out below.
It is our general view that a housing loan amortized over 25 years, renewable every five years, at a prescribed rate of interest would be considered to be consistent with normal commercial practice while a non-interest bearing loan with a 15 year repayment term would be considered much less so. It follows, also, that any change to the repayment arrangement that would bring it closer to one that is available in normal commercial practice would increase the likelihood that it would be considered bona fide.
It is our view that the fact that a demand loan is involved does not in and by itself result in the arrangement not being bona fide. In this regard, such a characteristic could be consistent with acceleration clauses found in commercial loan agreements. However, notwithstanding this point, commercial housing loan agreements also specify a term, (the maximum of which is normally 7 years), under which the loan can be renewed if the lender and borrower agree to do so. Such a term allows the lender to assess whether to extend the loan and charge interest at the relevant rate pursuant to circumstances existing at that time. In relating these comments to the above situation, the fact that a 25 year term is involved suggests that only one rate of interest is involved and the length of the term is well beyond that which would be provided under a commercial lending agreement. We would, accordingly, not view the loan as having been made on a basis that is consistent with commercial lending practice with an increased likelihood that the arrangement may not be viewed as being bona fide.
We also note that it is our general view, consistent with normal commercial practice, that bona fide arrangements in respect of a loan described in subparagraph 15(2)(a)(ii) of the Act would include mortgage security on the property acquired by the shareholder.
These comments represent our opinion of the law as it applies generally and as indicated in paragraph 21 of Information Circular 70-6R2 are not binding on the Department.
We trust that these comments will be of assistance to you.
Yours truly,
J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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