26 January 1995 External T.I. 9427295 - TRANSFER OF HOUSE/CAR LOANS FROM OPCO TO HOLDCO

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:

do excepting loans under 15(2)(a)(ii) and 15(2)(a)(iv) continue to qualify for exclusion from income where the employee of Opco transfers shares in Opco to Holdco in exchange for shares of the holding company

Position TAKEN:

•Provided that the terms of the loan agreements remain unchanged and that the transfer does not result in new loan agreements - including for the purpose of refinancing - between the shareholding employee and the creditor, it is our view that the transfer of the loans to the holding company will not in and of itself alter the nature of the orginal loan agreement. It is a question of fact as to whether shareholder loan agreements have been altered to the extent that they could be considered new loans. The shareholder must also be an employee of Holdco.

Reasons FOR POSITION TAKEN:

•933037, 923226, 930639, 5-9614, 5-6343

		942729
XXXXXXXXXX	Sandra Short

Attention: XXXXXXXXXX
January 26, 1995

Dear Sirs:

Re: Transfer of Housing and Automobile Loans

This is in reply to your letter of October 16, 1994 concerning shareholder loans. We apologize for the delay in responding to you.

Specifically, you have asked that we consider the situation of an owner-manager who transfers the shares of his or her operating company to a holding company in exchange for shares of the holding company. The owner-manager had previously received housing and automobile loans from the operating company which were not included in income pursuant to the excepting provisions of subparagraphs 15(2)(a)(ii) and 15(2)(a)(iv) of the Act. You have asked whether the exceptions in subsection 15(2) will still apply if the loans are transferred to the holding company via a dividend in-kind.

The situation with which you are concerned appears to relate to a specific taxpayer and involves proposed transactions. Confirmation of the tax consequences of such 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 and the related Special Release dated September 30, 1993. We are, however, providing you with the following general comments.

We are not clear on the meaning of transferring loans "via a dividend in-kind" but have assumed for the purposes of our reply that the debt originally owing to the operating company by the shareholder employee remains outstanding (and has not otherwise been settled or extinguished through the transfer) and is now owing to the holding company rather than the operating company by the shareholder. It would appear that a change to the creditor has occurred. Provided that the terms of the loan agreements remain unchanged and that the transfer does not result in new loan agreements - including for the purpose of refinancing -between the shareholding employee and the creditor, it is our view that the transfer of the loans to the holding company will not alter the nature of the original loan agreements. While it is a question of fact as to whether shareholder loan agreements have been altered to the extent that they could be considered new loans, we would not consider the loans to be new loans solely by reason of the transfer to the holding company or a change to the creditor.

We would point out that where a shareholder is not also an employee of the transferee corporation which subsequently holds the loan, the exception in subsection 15(2) of the Act will no longer apply after the transfer of the loans since the shareholder is not an employee of the transferee creditor corporation.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch