12 July 1999 External T.I. 9918015 - PAYMENT OF A DECEASED SLH'S LOAN

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:

An individual owned 100% of the shares of a CCPC until his death and, in prior years, had included amounts in income under subsection 15(2). The individual’s spouse, as sole beneficiary of the individual’s estate, receives the shares and is considering repaying the outstanding shareholder loans and wishes to know whether she will be entitled to a deduction under paragraph 20(1)(j).

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

The Department’s position in paragraph 32 of IT-119R4 does not apply to those situations where the estate did not repay the shareholder loan, but rather the loan was repaid by a beneficiary of the estate.

XXXXXXXXXX 5-991801
M. Azzi
Attention: XXXXXXXXXX

July 12, 1999

Dear Sirs:

Re: Paragraph 20(1)(j)of the Income Tax Act (the “Act”)

This is in reply to your letter of June 22, 1999, wherein you requested our comments with respect to the application of paragraph 20(1)(j) of the Act. You have described a situation where a Canadian-Controlled Private Corporation (“CCPC”) was owned 100% by an individual (Mr. X) until his death. The sole beneficiary of Mr. X’s estate was his spouse (Mrs. X). Mrs. X currently owns 100% of the CCPC. Prior to Mr. X’s death, Mr. X reported income of $30,000 and $6,000 pursuant to subsection 15(2) of the Act in 1993 and 1994, respectively. Mrs. X is now considering repaying the outstanding shareholder loans and you wish to know whether she will be entitled to a deduction pursuant to paragraph 20(1)(j) of the Act.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out 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 offer the following general comments.

The Department’s position on the repayment of a shareholder’s loan after the death of the shareholder is discussed in paragraph 32 of Interpretation Bulletin IT-119R4, Debts of Shareholders and Certain Persons Connected With Shareholders. The bulletin states:

“As paragraph 20(1)(j) refers to a ‘taxpayer’ and the Act defines a ‘taxpayer’ as including a ‘person’ and a ‘person’ as including a legal representative after death, the deceased taxpayer’s estate can claim the deduction under this paragraph in the year a repayment is made. In order to make the claim, the deceased must have included the amount of the loan in income in a preceding taxation year”.

The interpretation in paragraph 32 of IT-119R4 does not apply to those situations where the estate did not repay the shareholder loan, but rather the loan was repaid by a beneficiary of the estate. Accordingly, in the scenario described above, Mrs. X would not be entitled to a deduction under paragraph 20(1)(j) of the Act.

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch