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:
Tax consequences of a loan made by a corporation to a shareholder/employee to enable the individual to acquire a dwelling.
Determination of what changes in terms of a debt would result in the novation of the debt and the tax consequences if a new debt is created.
Position TAKEN:
Q of F whether or not loan received by virtue of employment or shareholdings. If the individual did indeed receive the loan in question by virtue of his/her employment, then the benefit would be calculated under subsection 80.4(1) of the Act. The provisions contained in subsections 80.4(4), (6) and (7) of the Act may then be applicable.
Subsection 80.4(4), which limits the prescribed rate to be used for a home purchase or home relocation loan, only applies in respect of a benefit determined under subsection 80.4(1) of the Act.
If loan received by virtue of shareholdings it would be subject to the provisions of subsection 80.4(2) of the Act, assuming the amount of the loan was not included in the shareholder's income under subsection 15(2) of the Act.
If there has been a disposition of the existing loan it necessarily follows that a new loan is created. This will be a Q of F. If the issuing of the new security does result in a novation of the original loan, the new loan, because it serves to refinance an existing debt, would not qualify for the exemption provided for in subparagraph 15(2)(a)(ii) of the Act.
Reasons FOR POSITION TAKEN:
These positions are consistent with the comments in previous correspondence and IT-119R3 and IT-448.
950974
XXXXXXXXXX D. Zion
Attention: XXXXXXXXXX
August 11, 1995
Dear Sirs:
Re: Subsection 15(2) and Section 80.4 of the Income Tax Act
This is in reply to your letter of March 29, 1995 in which you asked us to comment on the tax consequences of a loan made by a corporation to a shareholder/employee to enable the individual to acquire a dwelling. We apologize for the delay in responding.
You have set out the following hypothetical situation:
1.A related group of individuals hold all the issued and outstanding shares of Opco. Some of the shareholders are also employees of Opco.
2.An employee/shareholder received an interest-free loan from Opco to acquire a dwelling for the individual's personal habitation.
3.The loan is assumed not to be subject to subsection 15(2) of the Income Tax Act (the "Act") as it qualified under the exempting provision of subparagraph 15(2)(a)(ii) of the Act.
4.An interest benefit is calculated annually and included in the income of the employee/shareholder pursuant to subsections 80.4(1) and (4) of the Act.
Please note that enquiries relating to a factual situation involving completed or partially completed transactions should ordinarily be submitted along with all relevant facts and documentation to the local tax services office for their views in this regard. We are however, prepared to make some general comments which should be of assistance to you.
The Federal Court of Appeal in The Queen v. Silden, 93 DTC 5362, held that subsection 15(2) of the Act applies not only to loans made to shareholders as shareholders but also to loans made in the ordinary course of business to employees who happen to be shareholders. Accordingly, subsection 15(2) of the Act will apply to any loan or indebtedness granted to a shareholder regardless of the capacity in which the shareholder received the loan or incurred the indebtedness unless the conditions of one of the exceptions contained in paragraphs 15(2)(a) or (b) are satisfied.
This response is provided based on subsection 15(2) of the Act as it is presently enacted. We draw your attention to clause 7 of the draft amendments to the Act as released by the Department of Finance on April 26, 1995. The proposed amendments are intended to clarify the rules that apply where loans are made to taxpayers who are both shareholders and employees of a corporation. New paragraph 15(2.4)(e) of the proposed legislation will require that the loan be made to an employee because of the employee's employment and not as a result of the employee's shareholdings in order for the individual to qualify for the exceptions. Accordingly, under the proposed amendments to subsection 15(2) of the Act, if a housing loan is received by virtue of the employee's shareholdings the loan would be required to be included in income.
Whether or not a loan made by a corporation to an individual could be considered to be received by the individual in his/her capacity as an employee or as a shareholder involves a finding of fact in each particular case. The Department takes the position that where a public corporation makes a loan to a shareholder in his/her capacity as an employee rather than as a shareholder, on the same terms and conditions as to other employees who are not shareholders, the loan would be considered to be a loan received by virtue of one's office or employment rather than one's shareholdings. However, the situation could be different where the individuals are shareholders in a private corporation. As a further comment, we note that where a particular benefit is available only to shareholders, there is a presumption that the benefit is made to the individual in his/her capacity as a shareholder. If the individual is a shareholder and employee of a company, and a review of all the facts of the case indicate that the individual did indeed receive the loan in question by virtue of his/her employment, then it is the Department's position that the interest benefit would be calculated in accordance with subsection 80.4(1) of the Act. The provisions contained in subsections 80.4(4), (6) and (7) of the Act may then be applicable.
You have also requested that we consider the tax consequences which would arise should Opco change the terms of the debt. Other than subsection 80.4(6) of the Act which deems a new home purchase loan to be received every five years where the repayment term of such loan exceeds five years, there is no specific provision in the Act which would aid in the determination of whether or not a new loan has been created for the purpose of section 80.4 of the Act. In order to determine whether or not the changes in the terms of a debt constitute a new loan, the comments in Interpretation Bulletin IT-448 which explain the Department's views on the circumstances that may result in a disposition of a security, are of assistance. As stated in paragraphs 6 to 8 of IT-448 "Dispositions - Changes in Terms of Securities", we do not usually consider a change in the terms of a debt obligation to be a disposition unless the change is fundamental to the economic interest of the parties involved and the change is not a change authorized by the original terms of the agreement. If there has been a disposition of the existing loan it necessarily follows that a new loan is created. In our view, a new loan would not arise if Opco was to amend the terms of its loan from interest-free to interest-bearing if the original terms of the loan provided that the parties could change the interest rate.
In a situation where changes to the original loan result in the novation of the original loan, the new loan, because it serves to refinance an existing debt, would not qualify for the exemption provided for in subparagraph 15(2)(a)(ii) of the Act. On this subject, we refer you to paragraph 17 of 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". Accordingly, the indebtedness which would arise where changes in the terms of a debt result in a disposition of that debt and the substitution of a new debt would not fulfil the requirements of subparagraph 15(2)(a)(ii) of the Act. The basis for this position is that the new loan 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 and the loan would be included in the shareholder's income in the year received if not repaid within one year from the end of the corporation's taxation year.
Subsection 80.4(4) of the Act provides rules that are beneficial in respect of a "home purchase loan" as defined in paragraph 80.4(7)(a) of the Act (see paragraphs 14 and 15 of IT-421R). The definition of "home purchase loan" only refers to a loan received or a debt otherwise incurred in the circumstances described in subsection 80.4(1) of the Act. Where the new loan, which, as previously discussed, does not meet the requirements of subparagraph 15(2)(a)(ii) of the Act, is repaid within one year from the end of the corporation's taxation year and, at the time the new loan was received subsection 80.4(1) of the Act was applicable, the new loan would meet the definition of a home purchase loan pursuant to paragraph 80.4(7)(a). Thus, the provisions of subsections 80.4(4) and (6) of the Act would apply to the new loan for the time period in which an interest benefit must be computed. The prescribed rate referred to in subsection 80.4(4) of the Act would be the prescribed rate on the date the new loan is advanced. 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.
These comments represent our opinions of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1991, these opinions do not constitute an advance income tax ruling and are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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