4 November 1989 Income Tax Severed Letter AC74382 - Transfers and Loans to Corporation

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.

Legislative Affairs                Specialty Rulings
  Directorate                         Directorate
                                   A.A. Cameron
                                   957-2115
Mr. B. Bryson
A/Director
Subject:  Paragraphs 74.4(2)(e) and 74.5(7)(a)    7-4382
        of the Income Tax Act (the "Act")

We are enclosing a copy of our response to a question concerning the above-noted provisions of the Act which is to be presented at an up-coming meeting of the 19(1)

Our response to this question highlights an apparent deficiency in the Act which we discussed briefly with Mr. Gerry Lalonde of the Department of Finance.

We would appreciate your forwarding a copy of this material to Mr. Gerry Lalonde as soon as possible so that consideration can be given to an appropriate amendment to the Act.

M. A. Hiltz for Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

Section 4

If an individual resident in Canada guarantees a loan, made by a third party with whom he deals at arm's length, to a corporation which is a "specified person" with respect to him under paragraph 74.5(8)(b) of the Act, would the amount deemed to be have been received by the guarantor pursuant to subsection 74.4(2) of the Act be reduced by the interest paid by the corporation to the arm's-length lender. If so, is this based on paragraph 74.4(2)(e) of the Act?

DEPARTMENT'S POSITION

Pursuant to paragraph 74.5(7)(a) of the Act, for the purposes of sections 74.1, 74.2, 74.3 and 74.4, the property loaned by the third party is deemed to have been loaned by the above-mentioned individual to or for the benefit of the corporation. Assuming that one of the main purposes of the loan may reasonably be considered to be to reduce the income of the individual and to benefit a "designated person" (as defined in subsection 74.5(5) of the Act) in respect of the individual (after consideration of the provisions of subsection 74.4(4) of the Act) then a calculation pursuant to subsection 74.4(2) of the Act will be required for any taxation year in which the loan was outstanding to determine the amount that is deemed to have been received as interest in the year by the individual.

In our view, paragraph 74.4(2)(e) of the Act does not permit interest payments received by the third party from the corporation to be deducted when making the above-mentioned calculation, since the individual is not deemed to have received such interest payments. We understand that the Department of Finance is aware of this situation and is considering an amendment to the Act.