4 April 1995 External T.I. 9432435 - LOW INTEREST LOANS

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:

The issue is whether a benefit can be determined in respect of a loan on the basis of prescribed rate in effect at the time the first advance is made or, in the alternative, at the time of the last advance where a "home purchase loan" (80.4(7)(a) is made in instalments. (As it seemed that the individual might also be a shareholder, comments on the Silden case (93 DTC 5362) were made as well as comments in respect of the circumstances where the loan was considered to have been made to the individual in his/her capacity as a shareholder.)

Position TAKEN:

Neither of two times is acceptable, Rather, the prescribed rate in effect at the time of each advance must be used.

Reasons FOR POSITION TAKEN:

This position is consistent with the position in 920461.

		943243
XXXXXXXXXX	M. Eisner

Attention: XXXXXXXXXX

April 4, 1995

Dear Sirs:

Re: Loan to Purchase Residence

This is in reply to your letter of December 5, 1994 in which you asked us about the tax consequences of a loan made by a corporation to an employee with respect to the acquisition of a dwelling.

You are concerned with the type of situation where a corporation advanced funds in instalments to one of the corporation's employees with respect to the construction of the employee's personal residence.

In the above type of situation, it appears possible that the individual might also be a shareholder. If this were to be the case, it was the Department's position that subsection 15(2) of the Income Tax Act (the Act) would not apply where it could be established that the loan was made to the individual in the capacity of an employee rather than in the capacity of a shareholder. However, the Federal Court of Appeal in The Queen v. Silden, 93 DTC 5362, held that subsection 15(2) of the Act applies not only to loans made to shareholders as shareholders but also to loans made in the ordinary course of business to employees who happen to be shareholders. As a result of this decision, the Department's position of only applying subsection 15(2) of the Act where a loan is made to a shareholder in his or her capacity as an employee is under review. However, notwithstanding these comments, we have proceeded to comment on the above situation in relation to section 80.4 of the Act on the basis that the loan satisfies all the requirements of subparagraph 15(2)(a)(ii) of the Act in the event that the individual is a shareholder. The effect of this assumption is that the determination of a benefit under section 80.4 would not, for the most part, be negated by virtue of paragraph 80.4(3)(b) of the Act.

If the individual in the above situation is a shareholder in addition to being an employee, we wish to point out that, since the definition of "home purchase loan" in paragraph 80.4(7)(a) of the Income Tax Act (the Act) only refers to a loan described in subsection 80.4(1) of the Act, these provisions as well as subsection 80.4(4) of the Act would not be applicable to a loan made to an individual in his or her capacity as a shareholder. If the loan was made to the individual in his capacity as a shareholder, the loan would be subject to the provisions of subsection 80.4(2) of the Act. Whether a loan has been made by a corporation to an individual in the individual's capacity as a shareholder or an employee involves a finding of fact in each particular case. However, we also note that where a particular benefit is available only to shareholders, there is a presumption that the benefit is made to the individual in his/her capacity as a shareholder.

We also note that similar comments would be made if the individual were to be "connected with a shareholder" for the purposes of subsections 15(2) and 80.4(2).

If the loan in the above type of situation has been made to the individual in his capacity as an employee, the tax consequences are set out below.

With respect to the circumstances where a loan has been advanced in instalments, subsection 80.4(4) of the Act refers to the "prescribed rate in effect at the time the loan was received". As a consequence of this wording, it is our view that this subsection would apply to each advance. Similarly, subsection 80.4(6) of the Act would apply to each advance. We would also advise that the Department has no administrative practice with respect to the application of these provisions.

It is also our view that if the individual and the corporation were to enter into an agreement which set out a maximum amount that would be advanced, the tax consequences would still be those set out in the preceding paragraph.

We trust our comments will be of assistance to you.

Yours truly,

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