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:
1. Would proposed paragraph 15(2.4)(a) apply to a loan made to a shareholder who is not a specified employee at the time the loan is made if the individual subsequently becomes a specified employee by acquiring additional shares:
a) in the same year as the indebtedness arose?
b) in a subsequent year?
2. Does the answer in b) change if the loan is repaid prior to the shareholder becoming a specified employee?
Position:
1. a) and b): Yes, subject to the application of proposed paragraphs 15(2.4)(e) and (f)
2. Same answer. Alternately, the application of subsection 15(2) could perhaps be prevented if proposed subsection 15(2.6) applies.
Reasons:
1. The condition that the employee not be a specified employee has to be met at the time the indebtedness arose.
970545
XXXXXXXXXX Roxane Brazeau-LeBlond, CA
Attention: XXXXXXXXXX
May 26, 1997
Dear Sirs:
Re: Proposed paragraph 15(2.4)(a) of the Income Tax Act (the "Act")
This is in response to your letter of January 31, 1997, in which you have requested our views on the application of the above-mentioned provision.
Hypothetical Situation:
An individual is an employee of a corporation (Corporation X) and also owns 5% of the issued shares of the corporation. As such, in your view, the individual is not, at that time, a specified employee as defined in subsection 248(1) of the Act. The individual receives a loan from Corporation X in taxation year 1.
Scenario 1:
The individual, either personally or through a wholly-owned corporation, acquires additional shares of Corporation X in taxation year 1, but after the receipt of the loan. As a result, the individual becomes a specified shareholder of Corporation X as defined under subsection 248(1) of the Act and, consequently, becomes a specified employee of the corporation.
Scenario 2:
The individual, either personally or through a wholly owned corporation, acquires additional shares in a subsequent taxation year (year 3) and becomes a specified shareholder, in year 3.
Question:
Would proposed paragraph 15(2.4)(a) of the Act preclude the application of proposed subsection 15(2) of the Act in respect of the loan made by Corporation X to the individual under each of the scenarios?
Would the answer be different in scenario 2 if the loan had been repaid prior to the individual becoming a specified employee?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.
The Notice of Ways and Means Motion issued November 20, 1996 which contains amendments to subsection 15(2) of the Act including new paragraph 15(2.4)(a) was incorporated in Bill C-69 which received first reading in the House of Commons on December 2, 1996. As you may be aware, Bill C-69 died on the Order Paper when Parliament was dissolved. The following comments are offered based on the assumption that the amendments to the shareholder loan rules, particularly the introduction of proposed subsection 15(2.4), are reintroduced and enacted into law in substantially the same form as proposed in Bill C-69.
Proposed subsection 15(2) of the Act requires that certain shareholder indebtedness be included in computing the income of such shareholders in the year in which the indebtedness arose. Proposed subsection 15(2.4) of the Act provides exceptions to the rule in proposed subsection 15(2) of the Act in respect of certain loans to shareholders who are also employees. Subject to proposed paragraphs 15(2.4)(e) and (f) of the Act, proposed paragraph 15(2.4)(a) of the Act provides an exception for loans or an indebtedness of an employee who is not a specified employee.
In subsection 248(1) of the Act, a "specified employee" of a person is defined as an employee of the person who is either not dealing at arm's length with the person or who is a specified shareholder of the person. A "specified shareholder" of a corporation means a taxpayer who owns, directly or indirectly, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation.
Although the individual in both scenarios may not be a specified shareholder of Corporation X at the time the loan or indebtedness arose, the individual may nevertheless be a specified employee of Corporation X at that time. This could be the case if, at that time, the individual is not dealing at arm's length with the corporation. Paragraph 251(1)(b) of the Act provides that it is a question of fact whether persons not related to each other are, at a particular time, dealing with each other at arm's length.
In the event that the individual is not a specified employee until the time the additional shares are acquired, the individual would not have been a specified employee at the time the loan or indebtedness arose. Therefore, in our view, subject to the application of proposed paragraphs 15(2.4)(e) and (f) of the Act, the exception in proposed subsection 15(2.4)(a) of the Act would appear to apply to prevent the application of proposed subsection 15(2) of the Act in both situations.
Subject to the application of proposed paragraphs 15(2.4)(e) and (f) of the Act, proposed paragraph 15(2.4)(a) of the Act would also appear to apply if the loan is repaid prior to the shareholder becoming a specified shareholder. Alternately, the application of proposed subsection 15(2) of the Act could be prevented if the loan or indebtedness was repaid in circumstances described in proposed paragraph 15(2.6) of the Act.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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