6 May 1992 Roundtable, 9211130 F - Interest Free Shareholder Loan's Not Repaid Within Year

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.

May 6, 1992

DRAFT RESPONSE

PRAIRIE PROVINCES TAX CONFERENCE

MAY 19 & 20, 1992

23.     Has the Department changed its administrative position with respect to subsection 15(2) and section 80.4?  Specifically, our previous understanding of the Department's policy was that where a corporation had an amount receivable from a shareholder as of its financial statement date and the amount was repaid by the next financial statement date resulting in a nil or a credit balance on the financial statement, no benefit would be assessed to the shareholder under subsection 15(2); however section 80.4 would apply to deem an interest benefit to the shareholder based on the amount outstanding during the year.  Subsection 15(2) would apply where the amount remained outstanding over two consecutive year-ends of the corporation.

Recently, we have noticed several instances where the taxpayer has been assessed a benefit under subsection 15(2) under the above circumstances.  Some assessments have included a 15(2) benefit at the beginning of the taxation year by the assessor, thus no interest benefit has been assessed for that year.  Alternatively, some assessments have not included a benefit until the end of the taxation year by the assessor, resulting in both income inclusion of that amount of the debt and an interest benefit in the same taxation year. Please clarify the Department's position relating to the above.

Response

Effective with the special release dated March 13, 1987 to Interpretation Bulletin IT-119R3, the Department's administrative practice in respect of the repayment of outstanding shareholder loans was changed in that we no longer permit a repayment in a particular taxation year to reduce the amount which would otherwise be included in a prior year on account of subsection 15(2) of the Act.  Our position as stated in Interpretation Bulletins IT-119R3 "Debts of Shareholders, Certain Persons Connected with Shareholders, etc" and IT-421R "Benefits to Individuals, Corporations, and Shareholders from Loans or Debts" has not otherwise changed. 

It is a question of fact as to whether a reduction in a shareholder's loan account constitutes a genuine transfer of property from the debtor to the creditor, that is, a repayment on account of the loan.  A shareholder's loan which is repaid within one year of the end of the taxation year in which the debt was incurred may be included in income if it is considered to be part of a series of loans and repayments.  Subsection 80.4(3) provides the authority to exclude the interest benefit from income where the amount of the loan or debt has already been included in income by reason of some other provision of Part I, such as subsection 15(2) of the Act.  Accordingly, no amount will be included in a shareholder's income in respect of a loan under subsection 80.4(2) for a taxation year if the amount of that loan has been included in income under subsection 15(2) for the same year or a prior year.