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:
Application of 15(2) to loan to President of Public Corporation
Position TAKEN:
Question of Fact. We are of the opinion that, in order to
trigger the application of subsection 15(2) of the Act, the
person receiving the loan or becoming indebted to the corporation
or related corporation must first be a shareholder of a
particular corporation or be connected with a shareholder of a
particular corporation.
Given the Appeal Court decision in the Silden Case (93 DTC 5362),
we can only reiterate that the Department's position of only
applying subsection 15(2) of the Act where a loan is made to a
shareholder in his/her capacity as a shareholder and not when a
loan is made to a shareholder in his/her capacity as an employee
is under review.
Reasons FOR POSITION TAKEN:
Court Decision in Silden.
May 17, 1994
Montreal District Office HEAD OFFICE
Audit Division Rulings Directorate
Section 442-4-1 D. Zion
J. Piazza, Chi (613) 957-8953
Attention: Mario Perna
940587
Shareholder Loan Subsection 15(2) of the Income Tax Act
This is in reply to your correspondence of March 8, 1994, and subsequent telephone conversations (Perna/Zion) regarding the application of subsection 15(2) of the Income Tax Act to a file currently under review by your section. We apologize for the delay in responding.
As you mention in your correspondence, the Department has stated at the 1980 and 1986 Annual Conference of the Canadian Tax Foundation Conference that subsection 15(2) would not be applicable where it could be established that a loan was made to the individual qua employee rather than qua shareholder. You have asked us to clarify the Department's position with respect to the application of this particular subsection given the recent Federal Court of Appeal decision in Silden (93 DTC 5362) and the comments made at the 1993 Canadian Tax Foundation Conference that the situation was under review .
You describe a situation where the president of a public company was advanced funds pursuant to a loan agreement. The money was advanced to enable the president to purchase shares of the company on the open market. He did not own any shares of the company prior to entering into this loan agreement. You state that in your opinion no bona fide arrangements were made to pay the loan at the time the agreement was signed. At present, the total amount advanced to the president of $XXXXXXXXXX pursuant to the loan agreement is still owing to the company although the president has since been dismissed. The ex-president receives and declares the dividends on the shares and you have advised that some of the shares are held in escrow by a trustee as security for the still outstanding company loan. You have clarified that one other senior executive of the company received a loan for the purchase of company shares in a similar manner.
Whether or not subsection 15(2) of the Act applies is a question of fact which cannot be determined with any certainty without a review of all the relevant facts and documentation surrounding the provision of the benefit. As the required documentation has not been provided, our comments as explained in our last telephone conversation, will be general in nature.
In the following comments, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").
Subsection 15(2) of the Act states, in part, that:
" Where a person (...) is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation...and the person...has in a taxation year received a loan from or has become indebted to the particular
corporation, to any other corporation related thereto..., the amount of the loan or indebtedness shall be included in computing the income for the year of the person..., unless
(...)"
We are of the opinion that, in order to trigger the application
of subsection 15(2) of the Act, the person receiving the loan or
becoming indebted to the corporation or related corporation must
first be a shareholder of a particular corporation or be
connected with a shareholder of a particular corporation.
Where a loan is made to a shareholder who is also an employee,
the Department's position was that subsection 15(2) of the Act
would not apply where it could be established that the loan was
made to the individual qua employee rather than qua shareholder.
However, as stated above, at the 1993 Canadian Tax Foundation
Conference the Department stated in reply to the question of
whether or not it intended to continue its policy of only
applying subsection 15(2) of the Act where a loan is made to a
shareholder in his/her capacity as a shareholder and not when a
loan is made to a shareholder in his/her capacity as an employee
that the position was under review.
In the judgment rendered by the Federal Court of Appeal in the
previously mentioned Silden case the Court held that subsection
15(2) of the Act applies not only to loans made to shareholders
as shareholders but also to loans made to employees who happen to
be shareholders. The Court commented:
"In our opinion, the text of the subsection is so
clear that the rulings of the Department of
National Revenue giving it a different
interpretation should be ignored."
Given the Appeal Court decision, we can only reiterate that the
Department's position of only applying subsection 15(2) of the
Act where a loan is made to a shareholder in his/her capacity as
a shareholder and not when a loan is made to a shareholder in
his/her capacity as an employee is under review.
We trust our comments will be of assistance to you.
P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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