24 March 1982 Income Tax Severed Letter

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.

DATE March 24, 1982

To- VANCOUVER DISTRICT OFFICE S. McKenzie, Chief of Audit

FROM- HEAD OFFICE Non-Corporate Rulings Division Peter E. Salvatori 593-7295

ATTENTION: R.M. Smith W.D. Donaldson Field Audit - 144-24

This is to reply to your memo of February 8, 1982 concerning the applications of subsection 15(2) and paragraph 20(1)(j).

You express the view that where there is a series of loans and repayments, no paragraph 20(1)(j) deduction should be allowed with regard to the repayment of amounts brought into income in a previous year. This would require accountants to ensure that all series shareholder loan accounts were in a credit balance at the end of the year.

Quite apart from the inflexibility that such a scheme could impose upon transactions not involving improper avoidance of tax, we do not agree that the procedure you favour is strictly in accordance with the rules provided in the Act.

In our opinion, a valid argument can be made that a bona fide repayment is not part of a 'series of loans and repayments' for the purposes either of subsection 15(2) or paragraph 20(1)(j). Although the contrary can also be asserted, the Department has decided that the former is the position best supportable in law. Thus, a bona fide repayment of a loan included in a taxpayer's income for a previous year (either because the time prescribed by subsection 15(2) for repayment ran out or because there was a series of loans and repayments) may be deducted from income in the year it is repaid. It follows from the above that bona fide partial repayments must also be recognized for the purposes of paragraph 20(1)(j). In this connection, the most convenient time for determining the amount loaned to a shareholder is the corporation's year end, when the accounts for the corporation are verified and where significant adjustments to the loan account are moreover most likely to occur. With respect to a 'repayment' i.e. net decrease, we would draw attention to the requirement in paragraph 35 of Interpretation Bulletin IT-119R2 that the reduction must be a bona fide repayment. Thus, where the series of loans and repayments are manipulated to produce nil fiscal year end changes and circumvent the anti-avoidance aspects of paragraph 20(1)(j), the supposed "repayment(s)" will not be recognized as such.

You have questioned the policy of not assessing a taxable amount under subsection 15(2) until the net increase or decrease for the borrower's complete taxation year can be established with certainty. You have provided an example of a series of loans and repayments involving a corporation with a June 30 year end, as follows:

Date                 Balance                 Fiscal Year Change

30 June 78          $ Nil 
31 Dec. 78             Nil                               $15,000 
30 June 79           15,000 
31 Dec. 79           35,000                              10,000 
30 June 80           25,000 
31 Dec. 80           30,000                              15,000 
30 June 81           40,000 
31 Dec. 81           46,000 
30 June 82           Not Known

In your view, the $10,000 increase for the period 31 Dec. 80 - 30 June 81 should be taxed immediately for the 1981 taxation year, regardless of whether all or a portion of the $6,000 increase for 30 June 81 - 31 Dec. 81 may later be brought into income for the same year.

In our opinion, it is preferable to wait until the amount to be included in income for the 1981 taxation year is certain, otherwise it might be necessary to serve the taxpayer with two notices of assessment for the same year. Moreover, the inclusion of the $10,000 above referred to is only as certain as the 31 Dec. 1981 balance. This figure is more likely to be free of error, generally, when all accounts of the corporation are verified rather than upon a selective audit of the shareholder's loan account at the calendar year end.

for Director Non-Corporate Rulings Division