7 July 1993 External T.I. 9306395 F - Loan to Purchase Principal Residence

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Loan to Purchase Residence

This is in reply to your letter of February 22, 1993 in which you asked us about the tax consequences of an amount owed to a corporation by an individual who is an employee and a shareholder of the corporation. We apologize for the delay in our response.

The situation with which you are concerned appears to relate to a specific taxpayer and involves proposed transactions. Confirmation of the tax consequences of such transactions will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R2 and the related Special Release dated September 30, 1993. We are, however, providing you with the following general comments.

Our Comments:

You are concerned with the type of situation where an individual, as a consequence of a move with respect to an employment position, receives a "home relocation loan" as defined in subsection 248(1) of the Income Tax Act (the Act) from his or her new employer (a partnership). Subsequently, when the individual ceases to be employed by the partnership and becomes an employee of his or her own corporation which owns a partnership interest in the partnership, the partnership transfers the loan to the individual's corporation.

In the above situation, while the loan is owed to the partnership, the amount of any benefit, subject to the provisions of subsections 80.4(4) and (6), would be calculated under subsection 80.4(1) of the Act up to the time that the loan is transferred to the corporation. Upon the transfer of the loan to the corporation, the loan initially made by the partnership might continue in existence (i.e., a new loan is not involved). With respect to an actual situation, it is a question of fact whether or not a debt obligation acquired by a third party from a creditor results in the extinguishment of the original obligation. However, the Department generally considers that the assignment of a debt obligation from a creditor to a third party does not have the effect of replacing the original obligation with a new obligation unless the facts indicate otherwise. On the assumption that it does continue in existence (i.e., subsection 110(1.4) of the Act would not apply as this provision is only relevant where another loan is used to repay a home relocation loan), the amount of any benefit would continue to be determined under subsection 80.4(1) subject to the provisions of subsections 80.4(4) and (6) of the Act. Of course, a deduction under paragraph 110(1)(j) of the Act could be claimed in respect of the related benefit. We are also mentioning, however, that the amount of the loan might, as discussed below, be included in the income of the individual under subsection 15(2), in which case, subsection 80.4(1) would become inapplicable by virtue of subsection 80.4(3) of the Act.

Once the loan is transferred to the corporation, it is our view that subsection 15(2) of the Act might be applicable. In this regard, part of the preamble in this provision refers to the circumstances "Where a person is a shareholder of a particular corporation ... and the person ... received a loan from or has become indebted to the particular corporation". With respect to this wording, it is our view that as a consequence of the transfer of the loan to the corporation, the individual has become indebted to the corporation. A second consideration is not so apparent and concerns whether the loan was received by the individual in his capacity as a shareholder or an employee. In the event that the loan was not received by the individual in his capacity as a shareholder, then it is our position that subsection 15(2) of the Act would not be applicable.

In the case of the second consideration, it is the Department's view that where an individual, who is a shareholder and an employee of a corporation, receives a loan or becomes indebted to his or her corporation, there is a presumption that the loan has been received by the individual by virtue of being a shareholder rather than by virtue of being an employee. However, the particular facts of a situation may indicate that the presumption has been rebutted.

In relation to the above comments, it is not possible to provide meaningful comments on the basis of the information that has been provided. If an actual situation similar to that set out above were to be considered, a review of the relevant facts would include the loan agreement in respect of the partnership, the policy of the partnership in respect of loans made to employees, the employment contract and the documentation relating to the loan as regards the corporation.

Where an individual becomes indebted to a corporation in his capacity as a shareholder with respect to a dwelling, the amount of the loan or indebtedness may not be subject to the provisions of subsection 15(2) by virtue of the exception in subparagraph 15(2)(a)(ii) of the Act provided all the relevant requirements have been satisfied. However, in Interpretation Bulletin IT-119R3 "Debts of Shareholders, Certain Persons Connected with Shareholders Etc.", paragraph 13 states that "The exceptions in subparagraphs 15(2)(a)(ii) to (iv) apply only where a specific loan was made or specific indebtedness arose for a qualified purpose and is used for that qualified purpose". As a consequence of these comments, the indebtedness in the above situation in respect of the corporation that replaces partnership indebtedness would not fulfil the requirements of subparagraph 15(2)(a)(ii) of the Act. The basis for this position is that the corporate indebtedness merely replaces the existing loan and cannot be considered to be used for the specific purpose set out in subparagraph 15(2)(a)(ii) of the Act. It would follow that the provisions of subsection 15(2) of the Act would be applied with respect to the indebtedness. In connection with these comments, we also note that subsection 80.4(3) provides that subsections 80.4(1) and (2) of the Act do not apply in respect of any loan or debt that was included in computing the income of a person under Part I of the Act. Accordingly, to the extent that the amount of the loan is included in the individual's income for a year under subsection 15(2), subsection 80.4(1) of the Act would not apply.

As a result of the foregoing comments, the need to comment on the requirement in subsection 15(2) of the Act concerning whether bona fide arrangements were made at the time the loan was made or the indebtedness arose has been obviated.

You have also indicated in your letter that you are concerned with the type of situation where an individual relocates as a consequence of an employment-related move in circumstances where the housing market at the new location is such that a suitable home is not available at the time of the move. Accordingly, the individual may rent for 6 months to a year prior to purchasing a new home or moving into a new home which was constructed on a lot purchased by the individual.

With respect to the above situation, a loan is considered to be a "home relocation loan" as defined in subsection 248(1) of the Act if, amongst other requirements, it is received in circumstances where the employee has commenced employment at a location in Canada and by reason thereof, has moved from a residence in Canada to another residence in Canada in which the employee ordinarily resided. In relation to this requirement, the length of the time frame involved before an employee purchases a new residence following a move could be an indication that it has not been satisfied. We are also adding that where the individual does ordinarily reside in the new residence within a time frame of less than a year, it appears to us that he or she could be regarded as residing therein as a consequence of the employment-related move. However, in an actual situation, the ultimate determination of whether a loan qualifies as a home location loan can only be ascertained following a review of all the relevant facts.

These comments represent a general interpretation of the law and, as such, may not be applicable in every situation. The determination of the tax consequences of a particular situation can only be made following a review of all the relevant facts and documentation. Should you have a factual situation, you may wish to apply for a binding advance income tax ruling.

We trust that our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch