22 June 1999 External T.I. 9905715 - SHAREHOLDER DEBT

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: Whether investing of surplus cash in term deposits and making a loan to a shareholder considered "ordinary business of lending money"?

Position: No.

Reasons: Taxpayer not carrying on business of lending money.

XXXXXXXXXX 				990571
Wm. P. Guglich
Attention:  XXXXXXXXXX 

June 17, 1999

Dear XXXXXXXXXX:

Re: Shareholder Debt

This is in reply to your letter of March 4, 1999 concerning the application of subsection 15(2.3) of the Income Tax Act (the "Act") in respect of a proposed loan from your corporation.

You indicate that you own the majority of voting shares in a Canadian controlled private corporation (the "CCPC") as defined by subsection 125(7) of the Act. The CCPC has some surplus cash which is presently invested in term deposits at 4%. You wish to purchase a holiday trailer and a bank loan interest rate would be about 6-8%. You therefore propose to borrow the money from the CCPC at a prescribed interest rate or some other FMV rate (which would be more than the 4% you are currently receiving from the bank).

It is your view that subsection 15(2.3) of the Act would apply respecting the loan from the CCPC and, therefore, subsection 15(2) would not apply. You contend that the CCPC has two businesses, its active business and its investment business [i.e. the lending of money to banks through the purchase of term deposits (i.e., GIC's)].

You have outlined what appears to be an actual fact situation related to an actual proposed transaction and, therefore, we bring to your attention Information Circular 70-6R3, dated December 30, 1996, issued by Revenue Canada (see attached). Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. In considering such a request we would require a complete description of all the relevant facts, information and proposed transactions. Nevertheless, we can offer the following general comments.

Our Comments

Subsection 15(2.3) refers to "the lenders ordinary business of lending money". The determination of whether or not a taxpayer is carrying on a money-lending business is a question of fact to be determined in each case.

In the British case of Litchfield v. Dreyfus, ((1906) 1KB 584), Farwell J. defines money-lending business at page 589 as follows:

"Speaking generally, a man who carries on a money-lending business is one who is ready and willing to lend to all and sundry, provided that they are from his point of view eligible... It is a question of fact in each case".

The Department's position on whether a taxpayer's business included the lending of money is summarized in paragraph 11 of IT-442R (copy enclosed) wherein it is stated that when determining whether a taxpayer's business included the lending of money it is not sufficient merely to find that loans are made; they must be made as an integral part of a business operation. In this regard paragraph 11 states:

"It is required that there be a certain system and continuity in the making of loans, and the purpose must not be the occasional investment of surplus funds, accommodation to friends or customers or advances that are intended to remain a part of the capital of the borrower".

In George A. Orban v. M.N.R., 54 DTC 148 (TAB), Judge R.S.W. Fordham, Q.C. considered whether the taxpayer, who made no loans other than the three mentioned in the case (loss realized on two of the loans), was a money lender. In the Orban case the taxpayer had some money available and this fact was known to only a few individuals with whom he was acquainted. Moreover, the taxpayer never advertised himself, nor was he listed anywhere as a money lender. Judge Fordham held that in order for a man to be a money lender there must be a certain degree of system and continuity in his transactions and found on the facts that these elements were not present.

In our view the investment of surplus cash by the CCPC in term deposits (GICs) and the loan to a shareholder to purchase a holiday trailer would not be considered a business of lending money. Consequently, subsection 15(2.3) of the Act would not in our view apply to the loan by the CCPC to the shareholder to purchase a holiday trailer. Subsection 15(2) of the Act would apply to the loan unless it is repaid within one year pursuant to subsection 15(2.6) of the Act.

The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in IC 70-6R3, they are not binding on Revenue Canada.

Yours truly,

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