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: Subsections 74.4(2) and 74.5(7) of the Income Tax Act ("the Act")
This is in reply to your letter dated October 12, 1993 wherein you requested an interpretation concerning the interaction of subsections 74.4(2) and 74.5(7) in circumstances where an interest bearing bank loan, guaranteed by one spouse, is made to an investment company owned equally by both spouses. More specifically, when subsection 74.5(7) of the Act deems a taxpayer to have made a loan for purpose of subsection 74.4(2) of the Act, you would like to know if it is our position, for the purpose only of paragraph 74.4(2)(e) of the Act, to deem the taxpayer to have received the interest paid by the corporation to the bank. We apologize for the delay in responding to your request.
As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents.
Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate taxation district office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.
Subsection 74.4(2) of the Act requires an individual who transfers or loans property to a corporation (other than a small business corporation) in circumstances where one of the main purposes of the loan may reasonably be considered to reduce the income of the individual and to benefit, either directly or indirectly, a person who is a "designated person" (as defined in subsection 74.5(5) of the Act) in respect of the individual, to include in his income a deemed interest.
When an individual is obligated to effect a guarantee to ensure the repayment of a loan made by a third party to or for the benefit of a "specified person" (as defined in subsection 74.5(8) of the Act), paragraph 74.5(7)(a) of the Act deems this individual, for the purposes of sections 74.1, 74.2, 74.3 and 74.4 of the Act, to have made a loan to or for the benefit of that "specified person". In our opinion, subsection 74.5(7) of the Act does not permit interest payments received by the third party from the corporation to be deducted when making the calculation provided by paragraph 74.4(2)(e) of the Act, since the individual is not deemed to have received such interest payments.
However, whether one of the main purposes of a loan described in subsection 74.4(2) of the Act is to reduce the transferor's income and benefit a designated person is a question of fact. We are of the opinion that, generally, the purpose test set out in subsection 74.4(2) of the Act would not be satisfied only by the fact that an individual guarantees an arm's length loan made by a bank, at a commercial rate, to a corporation of which his/her spouse owns not less than 10% of the issued shares of one class.
The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.
We trust that these comments will be of assistance to you.
Yours truly,
for Acting DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch
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