13 June 1996 External T.I. 9612035 - LOAN TO BUY WIFE'S INT IN HOME & IF LOAN QUA EE

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 in which a loan is granted to a s\h who is also an employee: secondary issue is whether a loan to purchase spouse's share of the matrimonial home is a loan to acquire a dwelling for habitation

Position:

qfact as to whether loan granted qua employee or qua shareholder and a loan to buy out spous's share of matrimonial home is not a qualified purpose

Reasons:

as stated at 1980 and 1986 CTF Round Tables. On secondary issue, a loan to buy out a co-owner's share in dwelling does not enable the s/h to acquire a dwelling since s/he already owns it

A. Humenuk
XXXXXXXXXX 961203

Attention: XXXXXXXXXX

June 13, 1996

Dear XXXXXXXXXX:

Re: Shareholder Loans

We are replying to your letter of April 3, 1996, concerning the capacity in which a loan is granted to an individual who is both a shareholder and an employee of the creditor corporation.

The situation set out in your letter appears to relate to a specific taxpayer. Confirmation of the tax consequences of proposed 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 dated September 28, 1990, and the related Special Release dated September 30, 1992. On the other hand, if a transaction has already occurred, you may wish to submit the relevant facts and documentation to your local tax services office for their views. We are, however, providing you with the following general comments.

Subsection 15(2) of the Income Tax Act (the Act) requires a shareholder to include in income the amount of any loan or indebtedness to the corporation unless the loan or indebtedness meets any of the criteria for exception currently found in paragraphs 15(2)(a) and (b) of the Act. The amendments to this provision proposed in the draft legislation released April 25, 1995, state that subsection 15(2) does not apply to a loan or debt that arose in the circumstances set out in draft subsection 15(2.4) of the Act, if, among other things, it is reasonable to conclude that the loan or indebtedness is received by the employee or the employee's spouse because of the employee's employment rather than the employee's shareholdings.

Whether or not a loan made by a corporation to an individual is considered to have been received by that individual in his or her capacity as an employee or as a shareholder involves a finding of fact in each particular case. It is our view that when a public corporation makes a loan to a shareholder on the same terms and conditions as to other employees who are not shareholders, the loan would normally be considered to be a loan received by virtue of that individual's office or employment rather than his or her shareholdings. However, when the opportunity to borrow funds is only made available to shareholders or when the terms and conditions attached to loans to employee-shareholders are more favourable than those attached to loans to other employees, there is a rebuttable presumption that the loan has been made to the employee-shareholder in his or her capacity as a shareholder.

In your analysis, you state that it is unreasonable to compare the compensation package of an employee-shareholder with that of an employee who is not a shareholder but performs substantially the same duties as the employee-shareholder, either for the same employer or an employer in a similar business, because the employee-shareholder is often required to provide a personal guarantee in respect of the corporate financing. In your view, the reasonableness of the compensation package should factor in the additional benefit enjoyed by the corporation from the use of a shareholder's personal guarantee for corporate financing.

It is our view that any compensation related to a personal guarantee required of an employee-shareholder in respect of corporate financing is presumed to be given by reason of that individual's shareholdings. Thus, a loan which is made in whole or part to an employee-shareholder as a result of such a guarantee, would be considered to be made by reason of the individual's shareholdings.

In the situation you described in your letter, the funds are to be used by an employee-shareholder to acquire his wife's interest in their jointly-owned matrimonial property, as required by their written separation agreement. Since the employee-shareholder already owns the house in question, albeit jointly, a loan for this purpose would not assist or enable him "to acquire" a dwelling. Thus, the loan would be included in the shareholder's income under subsection 15(2) of the Act regardless of whether the loan was granted by reason of shareholdings or employment.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch