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.
Will subsections 15(1) or 56(2) apply when intercorporate debt is used to utilize non-capital losses within a corporate group?
Only if the corporation receiving the funds will not be in a position to repay the loan or provide reasonable security for repayment.
Reasons FOR POSITION TAKEN:
Our general position is as stated in response to Q. 51 of the 1981 RC Round Table. In the situation where it is known that repayment will not occur, the shareholder who has directed the payment may be considered to have permanently removed value from the corporation.
XXXXXXXXXX A. Seidel
October 28, 1994
This is in reply to your letter dated January 25, 1994 with respect to the application of subsections 15(1) and 56(2) of the Income Tax Act (the "Act") to intercorporate debt between related corporations designed to permit them to utilize non-capital losses within a corporate group.
We apologize for the delay in responding to your enquiry.
The Department's position with respect to the application of subsection 15(1) of the Act where intercorporate debt between related corporations is used to utilize non-capital losses within the corporate group continues to be as stated in response to Question 51 at the 1981 Revenue Canada Round Table. In general, subsection 15(1) of the Act will not be applied in respect of bona fide intercompany loans arising in the course of carrying on the business of the two corporations, including the situation where the loan is made to utilize non-capital losses within the corporate group.
The application of subsection 56(2) of the Act is discussed in Interpretation Bulletin IT-335R. Under this subsection a taxpayer can be taxed on an amount not received by him if certain conditions are met. One of the conditions is that the taxpayer would have been taxable on the amount if it had been paid directly to the taxpayer. Thus, in applying the provisions of subsection 56(2) of the Act, it is necessary to determine the provision of the Act under which the amount would have been included in the taxpayer's income if it had been paid to the taxpayer directly. In the case of bona fide loans, subsection 56(2) of the Act will not generally be applicable as such a loan does not constitute a "payment or transfer of property" within the meaning of that subsection. Where, however, it is apparent at the time the loan is made that the corporation receiving the funds will not be in a position to repay the loan or to provide reasonable security for repayment, the shareholder who has directed the payment may be considered to have deliberately and permanently removed value from the corporation. Consequently, in such circumstances, subsections 15(1) and 56(2) may be applied to include the amount in the shareholder's income.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Reorganizations and Foreign Division
Policy and Legislation Branch
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