20 January 2011 External T.I. 2010-0382431E5 - Shareholder Loans

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.

Principal Issues: Whether personal loans from a company repaid with dividends each fiscal year by a shareholder, would meet the exemption under 15(2.6).

Position: Maybe

Reasons: It is a question of fact if the loans meet the criteria for repayments within one year, and are structured under bona fide terms.

XXXXXXXXXX
								2010-038243
								J. Nichols

January 20, 2011

Dear XXXXXXXXXX :

Re: Shareholder Loans

I am writing in reply to your email dated October 1, 2010, requesting our assistance in determining whether various shareholder advances taken at various times during the year, and repaid with dividends each fiscal year by the shareholder, would meet the exception under subsection 15(2.6) of the Income Tax Act (the "Act").

Our comments

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed, and are the subject matter of an advance income tax ruling, submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Ruling, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website. We are, however, prepared to provide the following general comments.

Interpretation Bulletin IT-119R4, "Debts of Shareholders and Certain Persons Connected With Shareholders" outlines generally that shareholders are taxable on amounts received from corporations. Subsection 15(2) of the Act ensures that this general rule applies when a shareholder receives amounts from a corporation in the form of a loan. However, there are various exceptions to the application of subsection 15(2). As you have noted, one such exception is in subsection 15(2.6), which is discussed in more detail in paragraphs 24 - 29 of IT-119R4. This exception will apply if the taxpayer pays the loan back within one year, the loan is not part of a series of loans or repayments and the loan is set up under bona fide arrangements.

Each situation involving shareholder loan accounts would be reviewed on its own facts. However, where there are bona fide repayments of shareholder loans which are the result of the declaration of dividends, salaries or bonuses they will not be considered to be part of a series of loans or other transactions and repayments. This view is confirmed in paragraph 29 of IT-119R4. Accordingly, provided the other conditions described above are met, it would be acceptable for a taxpayer to build up the shareholder loan account balance each year and reduce it by the dividend received each year without being required to include the loans in income pursuant to subsection 15(2) of the Act.

You should also be aware of a potential deemed interest benefit from loans obtained due to shareholdings, under subsection 80.4(2) of the Act, which compares the interest calculated at prescribed rates on the outstanding loan balance to the actual interest paid on the loan balance. You may refer to Interpretation Bulletin IT-421R2, "Benefits to Individual, Corporations and Shareholders from Loans or Debt" for additional information.

We trust our comments will be of assistance.

Yours truly,

Renée Shields
for Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch