12 October 1995 CTF Roundtable Q. 1, 9524620 - CAPACITY IN WHICH A LOAN REC'D & RUNNING ACCOUNTS

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:

capacity under which shareholder loan is received & whether a running acct involves a series of loans and repayments

Position: question of fact

Reasons:

DRAFT

1995 Ontario Tax Conference
October 12, 1995

Loans to Shareholders - Subsection 15(2)

Question 1

For the purposes of the new paragraph 15(2.4)(e) proposed by the April 26, 1995 Technical Amendments, what factors will Revenue Canada consider in determining whether a loan received by an employee who is also a specified shareholder is received because of the taxpayer's employment and not because of the taxpayer's shareholdings?

Department's Response

Notwithstanding the draft legislation released by the Department of Finance on April 26, 1995, the Department's position on the capacity in which an employee-shareholder receives a loan remains unchanged from that which was stated at the 1980 and 1986 Canadian Tax Foundation Revenue Canada Round Tables. At that time we stated: It is a question of fact to be determined in a particular case as to whether or not a loan made by a corporation to an individual could be considered to be received by the individual in his/her capacity as an employee or as a shareholder. The Department takes the position that where a public corporation makes a loan to a shareholder in his/her capacity as an employee rather than as a shareholder, on the same terms and conditions as to other employees who are not shareholders, the loan would be considered to be a loan received by virtue of one's office or employment rather than one's shareholdings. However, the situation could be different where the individuals are shareholders in a private corporation.

Question 2

For the purposes of the new paragraph 15(2.4)(e) proposed by the April 26, 1995 Technical Amendments, under what circumstances would a loan to an individual who is the sole shareholder, director, officer and employee of a corporation be considered to be because of employment and not because of shareholdings?

Department's Response

Where the sole shareholder, director, officer and employee of a corporation wishes to obtain a loan from the corporation because of his or her employment that fits within draft paragraphs 15(2.4)(b), (c), and (d), the Department will generally consider a loan to be received by virtue of employment where an employee-shareholder can show that employees with similar duties and responsibilities to another employer of a similar size, but who are not shareholders of that other employer-corporation, receive loans of similar amounts under similar conditions as that granted to the employee-shareholder.

Question 3

How have the Attis v. M.N.R. 92 DTC 1128 (T.C.C.) and the Uphill Holdings Ltd. v. M.N.R. 93 DTC 148 (T.C.C.) decisions changed Revenue Canada's policy with respect to what constitutes a series of loans and repayments? In particular, how will running accounts where advances are repaid with salary, bonus and dividends be treated where there is an amount owing to the corporation by the shareholder at the corporation's year end?

Department's Position

At the 1994 Canadian Tax Foundation we stated that the Department's assessing position would conform to the Courts' view of the operation of paragraphs 15(2)(b) and 20(1)(j) as expressed in the Attis and Uphill cases. I.e., bona fide repayments of shareholder indebtedness which are the result of the declaration of salaries, bonuses or dividends will not considered to be part of a series of loans and repayments for the purposes of paragraphs 20(1)(j) and 15(2)(b) - now draft subsection 15(2.6). These repayments not being part of a series, will be considered to apply to the oldest loan or debt outstanding (first-in first-out basis) unless the facts clearly indicate otherwise (paragraph 24 of IT-119R3). This position will be applicable to so-called "running loan accounts" as that term is used in paragraph 26 of IT-119R3. Running loan accounts will not automatically constitute a series on loans and repayments.

IT-119R3 is currently under revision and the revision is not expected to be completed until the April, 1995, technical amendments become law.

Author: A. Humenuk (Q. 1 & 2) \ T. Murphy (Q. 3)
File: 952462
Date: October 2, 1995