10 December 1996 Internal T.I. 9639060 - TERMS OF REPAY FOR SH LOAN EXEMPT BY REASON OF THE ACT

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:

what constitutes reasonable terms of repayment for a shareholder loan exempt by reason of 15(2.3)

Position:

as long as the terms & conditions of a loan to a shareholder are the same as that for the public at large, the terms of repayment associated with such a commercial transaction will normally be treated as reasonable for the purposes of 15(2.3) -this includes revolving credit instruments which do not make provision for repayment of the entire loan but require minimum payments -however loans that are not exempt by reason of 15(2.3) will only be exempt under 15(2.4) or (2.5) if the terms for full repayment of the loan are set out at the time the loan is made

Reasons:

it is a question of fact as to what is reasonable in a given set of circumstances - for 15(2.4) & (2.5) loans, it is reasonable that the terms of repayment for the full amount of the loan should be set at the time the loan is made. However when a demand loan or a revolving credit is given to a shareholder on a commercial basis, on the same terms and conditions as offered to the public at large, including a requirement for minimum monthly payments, the terms of repayment are reasonable by reason of the fact that they are the terms of repayment required of the public at large on such loans

DRAFT
Revenue Canada Round Table
Tax Executive Institute
December 10, 1996

Question No. X

LOANS MADE TO SHAREHOLDERS IN THE COURSE OF CARRYING ON BUSINESS

The decision in The Queen v. Silden, 93 DTC 5362 (FCA), interpreting subsection 15(2) surprised many and resulted in proposed legislation to revise section 15. Taxpayers have expressed concerns to the Department of Finance about the scope of relief set forth in proposed subsection 15(2.3). In particular, the relief provision may not be adequate because of the addition of the phrase "bona fide arrangements were made for repayment of the debt or loan within a reasonable time" to that section. Financial institutions make substantial loans, including credit cards, personal lines of credit, business lines of credit, and other forms of revolving credit, that do not require the borrower to repay the entire amount by a fixed date. In addition, a number of individuals, either themselves or through a connected person (such as a parent or child), have made investments in companies related to financial institutions. As a result, these individuals may inadvertently and inappropriately be subject to tax under subsection 15(2) unless the relief exception of proposed subsection 15(2.3) applies.

Taxpayers have requested that the Department of Finance delete the quoted phrase. The Department of Finance has demurred making the requested change because Finance believes that Revenue Canada interprets the minimum payment amount required on credit cards and other revolving lines of credit as sufficient to meet the statute's test for "repayment" and, more generally, that subsection 15(2) does not apply in the "shareholder loan" circumstances described above. Please confirm whether the Department of Finance is correct in its understanding of Revenue Canada's interpretation of both the existing and proposed sections.

Department's Position

Generally, we are in agreement with the Department of Finance's understanding of our interpretation relating to bona fide arrangements for repayment, for the purpose of subsection 15(2.3) of the Act, in the manner outlined above. However, it is always a question of fact as to whether a bona fide arrangement is made, at the time a loan was granted, for repayment of the indebtedness within a reasonable period of time.

In considering the reasonableness of the terms of repayment attached to a loan made in the ordinary course of the creditor's business, a major consideration is the terms and conditions attached to similar loans offered to the public at large. When a loan is made to a shareholder in the ordinary course of the creditor's business with the same terms and conditions as offered to the public at large, the terms of repayment will normally be considered reasonable for the purpose of proposed subsection 15(2.3) of the Act. In particular, the minimum payments required under the terms of most commercial revolving credit sources will be considered to meet the requirement that bona fide arrangements be made for repayment of the debt or loan with a reasonable time for the purposes of proposed subsection 15(2.3) of the Act.

However, with respect to a loan which is excluded from a shareholder's income by reason of proposed subsection 15(2.4) or (2.5) of the Act, we expect that the specific terms of repayment for the full amount of the indebtedness will be set out at the time the loan is made. As a result, a demand loan or a revolving credit source will not ordinarily be accepted as a reasonable term of payment for the purposes of 15(2.4)(f) or 15(2.5)(d) of the Act.

Author: A. Humenuk
File: 963906
Date: November 26, 1996
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