Words and Phrases - "loan"

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13 June 2012 External T.I. 2011-0416781E5 F - Entente contractuelle particulière

intragroup charges to reflect use of each other’s capital under cash pooling arrangement are non-deductible

A cash pooling agreement (the “first contract”) stipulates that no interest is payable to a financial institution when the combined bank balance of all three corporations in the group (Corporations A, B and C) is positive. The "second contract" between Corporations A and B provides that where no interest has been charged by the financial institution to Corporation B, respecting its use of its line of credit, because of this cash pooling arrangement, then Corporation B is required to pay to Corporation A the equivalent of the interest that would otherwise have been paid by it to the financial institution but for the first contract. A similar contract (also, the "second contract") exists between Corporation A and Corporation C. Are the second contract amounts paid by Corporation B or C deductible under s. 20(1)(c)? CRA responded:

[I]t does not appear that amounts paid by Corporation B and /or Corporation C to Corporation A would constitute interest. …

… [I]t cannot be considered … that the amounts payable by Corporation B and/or Corporation C under the second contract could represent consideration for the use of an amount of capital (or a right to the amount of capital). …

[In addition t]he contractual relationship between Corporation A and Corporation B, on the one hand, and Corporation A and Corporation C, on the other hand, … does not appear to us to create a lender-borrower relationship between those corporations, so that subparagraph 20(1)(c)(i) cannot be applicable.

Words and Phrases
loan

5 July 2012 Internal T.I. 2010-0388551I7 F - Fiducie - retour de sommes

capital gain distributed by family trust to children and purportedly lent by them to their parents (also beneficiaries) was instead included in the parents’ income under s. 104(13)

A family trust whose beneficiaries included Father, Mother, two sons (Son A and Son B) and the wife of Son A (Daughter-in-law A) but not the wife of Son B (Daughter-in-law B) realized a capital gain on the disposition of a qualified small business corporation shares of Holdco, and distributed a portion of those gains to the above four children who, however, immediately returned most of the distributed funds to Father and Mother and were issued “Acknowledgements of Debt” which, however, they never received and, in fact, Father requested that the auditor not mention to them that they were owed these amounts. (A variation of these transactions applied to Daughter-in-law A.) The distributed gains were reported on their returns, with Father paying all the alternative minimum tax. Father and Mother invested the “returned” amounts and reported the income thereon.

In doubting that the purported loans should be respected, the Directorate stated:

Father and Mother argue that the so-called acknowledgements of debt support a creditor/debtor relationship. These documents, which are similar in wording to demand notes, were not delivered to Son B and the two Daughter-in-laws. Pursuant to section 178 of the Bills of Exchange Act (RSC 1985, c. B-4), a note is inchoate and incomplete until delivery thereof to the payee or bearer, that is to say, that it is incomplete until it has been given to the beneficiary.

In finding that (subject to the further issue that Daughter-in-law B was not a beneficiary) such amounts were likely excluded from the children’s income as agents, included in the income of Father and Mother under s. 104(13) and deductible by the Trust under s. 104(6), the Directorate stated:

[T]o allocate income to Son B and the two daughters-in-law who acted as agents or nominees of Father and of Mother for the income to be treated as if it were payable to them for the purposes of subsections 104(13) and 104(24). Son B and the two daughters-in-law were therefore entitled to claim the sums payable as agents or nominees of Father and Mother, ensuring that they gave Father and Mother a large part of the sums paid by Trust (except the amount paid to thank them for acting as an accommodation party).

Trust could benefit from the deduction under paragraph 104(6)(b) in respect of the portion of the income allocated (referred to in paragraph 22 of the Facts) to Father and/or Mother through Son B and Daughter-in-law A .

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) s. 75(2) does not apply to an estate freeze as the corp does not own its treasury shares issued to the trust 154
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) income distributed to daughter-in-law who in fact was not a beneficiary includible in her income under s. 105(1) but not deductible by trust under s. 104(6) 156
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(6) Foisy test of mental element accepted 221

Meilleur v. The Queen, 2016 TCC 287

retired individuals making 5 high-yield loans on a pooled basis lacked a money-lending business

Beginning in 2006, the two married taxpayers (Susan and Barry) used their retirement funds and borrowed money to make advances to two real estate developers (on a pooled basis along with other investors through an intermediary corporation referred to as “ACI”) at interest rates 10% to 19% higher than prevailing borrowing rates. Following the 2008 financial crisis, each of the advances was in default and an almost total loss was sustained.

In finding that the taxpayers were not entitled to s. 20(1)(p)(ii) deduction, Bocock J first found, after referring (at para 38) to “[t]he presence of recurring interest, specific balance due dates, mortgage security and the fulsome rights of enforcement,” that the advances qualified as loans or lending assets. However, in going on to find that they were not engaged in a money-lending business, he noted (at para 54):

a) The initial inconsistent approach and characterization of the advances by Susan as property investments earning income in the early and operative years of the business. …

c) The usual activities of a money lending business of this nature were not consistently present. There was no negotiation of financial terms with the borrowers, no revision of legal documentation reflecting the appellants’ direction and discernment and the lending opportunities were offered by a single third party and, at that, only on a take it or leave it basis; …

d) … ACI … acted as the primary party engaged in the relevant trade or undertaking and was not a mere agent or bare trustee facilitating the operation of Susan and Barry’s money lending business. …

e) Had the loans not ultimately defaulted, the Appellant was willing and did continue to advance funds solely for the purpose of earning interest, rather than turning the loans over for a profit in the nature of a business. …

Words and Phrases
loan

26 April 2016 Internal T.I. 2015-0623571I7 - one-time salary transition payment

employee advance not a “loan”

After stating that

A loan is generally defined as delivery by one party, and receipt by another party, of a sum of money upon agreement, express or implied, to repay with or without interest.

CRA indicated that it considered that an advance to an employee is current s. 5 income to him or her even if the advance is required to be repaid if the future services are not performed. Accordingly, a “transitional payment” made to employees, as a result to switching the payroll system to an arrears system, would be currently taxable rather than treated as a loan subject to s. 80.4(1) even if the employees were required to repay any overpayment on termination of employment.

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) advance to employee is current s. 5 income 229
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n) deduction for repayment of transitional advance 155

13 June 2012 Internal T.I. 2012-0448961I7 F - Paiements en trop faits par un employeur

grant of extended period for employee to repay overpayment was not a s. 80.4 loan

An employee was on extended sick leave but nonetheless received remuneration from the payroll service, which was not informed of the leave. On the employee's return to employment a number of years later, the error was discovered, and it was agreed that the overpayments would be repaid over a period that straddled two calendar years through deduction from the employee's post-return remuneration. CRA stated (TaxInterpretations translation):

[T]he fact that the employee reimburses the overpayments gradually does not constitute a non-interest bearing loan. Accordingly, the employer should not calculate a taxable benefit for imputed interest.

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 8 - Subsection 8(1) - Paragraph 8(1)(n) salary mistakenly paid after expiry of sick leave period and then repaid, treated as clerical error rather than s. 8(1)(n) adjustment 276

17 November 1999 T.I. 990126

"[W]here and individual transfers property to a partnership under subsection 97(2) of the Act and receives, in addition to a partnership interest as consideration, a promissory note payable over, say, five years, the agreed amount would include the note and this amount would be deemed to be the proceeds for the individual and the cost to the partnership. In such a situation, where a gain has been triggered, i.e., the agreed amount exceeds the adjusted cost base of the property transferred, the transferor will be entitled to claim a reserve under paragraph 40(1)(a) of the Act if the note taken back is received as a 'conditional payment'."

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) 108

21 March 2001 Internal T.I. 2000-005629 -

Where landlords agree to pay tenant inducements over a period of twenty years, the taxpayers would account for the amounts payable as "secured receivables" on the balance sheets in some instances, and in others as deferred income. Such amounts would not be loans or advances for purposes of s. 181.2(4)(b) because there is no lender and borrower relationship between the taxpayer and its landlord. "In order for there to be a loan at law, it is necessary that there be a delivery of the subject of the loan by the lender to the borrower and that there be an obligation on behalf of the borrower to return the subject matter of the loan".

Words and Phrases
loan

13 January 2012 Internal T.I. 2011-0414111I7 F - Deemed Interest Incomes - Exception 17(8)

CFA 1's purchased debt of CFA 2 did not qualify as a loan or advance

Where a taxable Canadian corporation makes a non-interest bearing loan to a controlled foreign affiliate (CFA 1) which, in turn, uses the proceeds to acquire the debt (the "Debt") of another CFA (CFA 2) from a non-arm's length Canadian corporation. CRA found that s. 17(8)(a)(ii) was not available as the Debt would not be considered to be a loan to the second CFA. In this regard, CRA quoted a judicial statement that "the courts have concluded that the concept of loan or advance is related to the existence of a payment of money between two parties and to the presence of that relationship of lender / borrower," and then stated:

[T]he contractual relationship between CFA 1 and CFA 2 with respect to the Debt establishes a creditor/debtor relationship and not a lender/borrower relationship. In fact, there was no agreement, either implied or explicit, nor a payment or acceptance of money between CFA 1 and CFA 2, which could enable us to conclude that there is a lender/borrower relationship. Although CFA 1 became the creditor of CFA 2 while acquiring the Debt, it never made a loan per se.

Words and Phrases
loan advance

12 March 1992 External T.I. 5-910839 -

With respect to an advance made by a Canadian licensor to a U.S. licensor that was repayable only out of royalties to be earned by the licensor, RC stated that "generally where the agreements in question do not contain an unconditional covenant to repay the principal amount of money advanced, the transaction cannot be considered to represent the loaning of money".

Words and Phrases
loan

5 November 1999 Memorandum 991063

Where a promissory note is issued to pay a dividend, the creditor (in this case, an NRO) will not be considered to have made a loan because no borrower-lender relationship will have been created as a result of the issuance of the promissory note.

Words and Phrases
loan

29 August 2011 Internal T.I. 2009-0336671I7 - Derivative

Interest rate swap transactions between a controlled foreign affiliate of the taxpayer ("BCo") and a foreign financial institution specializing in derivative contracts ("FCo") under which there was a fixed coupon swap of FCo computed and paid every six months at a fixed notional interest rate on a US-dollar notional principal and a second arm payable by BCo on (presumably the same) US dollar notional principal at the prevailing US six-month LIBOR rate but payable every X years, did not represent loans as "the legal form of the transactions must be respected."

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 185

Merchant v. The Queen, 2009 DTC 282, 2009 TCC 31

advance is current remuneration if repayable only out of future earnings

In finding that loans made to the taxpayer by his employer were employment income to him when received, Webb, J. stated (at para. 22):

"in a situation where a cheque is issued (or cash is dispersed) to an employee in relation to services that have been rendered and the transaction is labelled an advance or a loan but in reality the employee is only obligated to repay the amount, without interest, from subsequent salary or 'bonuses' paid by the employer, in my opinion, the real character of the amount received is that it is received as a payment of compensation and not a loan. There is no true intention that the employee will have to repay the amount from any source other than the future 'payments' to be made by the employer."

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 131

Banner Pharmacaps NRO Ltd. v. The Queen, 2003 DTC 245, 2003 TCC 82, aff'd 2003 FCA 367, 2003 DTC 5642

The taxpayer was not considered to be engaged in a business of making loans by virtue of the Canadian corporation of which it was a sole shareholder declaring a dividend and a stated capital reduction to be paid by way of the issuance of demand promissory notes.

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Timing 87

Loman Warehousing Ltd. v. Canada, 2000 DTC 6610 (FCA), aff'g 99 DTC 1113, Docket: 98-201-IT-G (TCC) infra

a taxpayer with a warehousing business potentially could have a lending business under a cash pooling arrangement

Noël JA, before rejecting the taxpayer's submission that the post-1993 version of s. 20(1)(p)(ii) contemplated a taxpayer whose ordinary business included the lending of money, and not the business of the lending of money, noted a concession of taxpayer's counsel that the taxpayer's sole business was that of warehousing and that it was not in the business of lending money, and then stated (in f.n. 2):

[T]his apparent concession is surprising as the business of lending money under the Act extends not only to one who lends money to all who qualify in the conventional sense (see Litchfield v. Dreyfus [1906] 1 KB 584 at 589) but would also include one who lends money on a regular and continuous basis over time to a limited group of borrowers for an arm's length consideration (see in particular the extended meaning of the word "business" in par. 248(1)).

Words and Phrases
loan money-lending business

Langhammer v. The Queen, 2001 DTC 45 (TCC)

Before going on to find that losses sustained by the taxpayer after investing in bonds of a condominium development were deductible under s. 20(1)(p)(ii) on the basis that the bonds were purchased in the course of carrying on a money lending business, Rip T.C.J. stated (at p. 52) that it had been recognized that "a debenture could be part of the portfolio held by a person carrying on the business of lending money; and that "debentures, bonds and term deposits are loans".

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(ii) occasional loans were money-lending business given that done similarly to a money lender 245

Autobus Thomas Inc. v. The Queen, 2000 DTC 6299 (FCA), briefly aff'd 2001 DTC 5665, 2001 SCC 64

The taxpayer partly financed the acquisition of buses by means of its bank purchasing conditional sales contracts from a manufacturer. Marceau J.A. found that the contractual relationship between the bank and the taxpayer was determined by the initial contract between them when a line of credit was established. Accordingly, both ss.181.2(3)(c) and (d) applied: the money owed by the taxpayer to the bank under the line of credit was both a loan and also a debt secured by the transfer of rights set out in the conditional instalment sales contracts.

Words and Phrases
loan

In re Touquoy Gold Mining Co. (1906), 1 E.L.R. 142 (Nova Scotia)

In finding that securities issued by a corporation that were referred to in various corporate documents as "preferred shares" and were evidenced by share certificates nonetheless represented secured loans made to the corporation for purposes of the Winding-up Act of Canada, Graham E. J. noted that a lien was placed on the assets of the corporation to secure the payment of the amounts advanced and the interest or "dividends" thereon, with a power of sale in case of default and the right to redeem on the part of the corporation within a fixed time. With respect to statements in the deed that the interest or dividends were to be paid out of profits, Graham E.J. stated (at p. 145) that "practically the interest due upon a mortgage is only paid out of profits" and (at p. 145) he referred to the following statement in Kent v. Quicksilver Mining Co., 78 N.Y. 178:

"The idea of a borrowing is not filled out unless there is in the agreement therefor a promise or understanding that what is borrowed will be repaid or returned, the thing itself or something like it of equal value, with or without compensation for the use of it in the meantime. To borrow is the reciprocal action of to lend, and to lend or loan, say the dictionaries, is the parting with a thing of value to another for a time fixed or indefinite, yet to have some time an ending, to be used or enjoyed by the other, the thing itself or the equivalent of it to be given back at the time fixed or when lawfully asked for, with or without compensation for the use, as may be agreed upon."

Words and Phrases
loan borrowing

Alberta and Southern Gas Co. Ltd. v. The Queen, 76 DTC 6362, [1976] CTC 639 (FCTD), aff'd 77 DTC 5244 [1977] CTC 388 (FCA), aff'd 78 DTC 6566, [1978] CTC 780, [1979] 1 S.C.R. 36

In finding that an agreement, under which in consideration for a payment of $4 million the taxpayer obtained certain rights and privileges to produce and take petroleum from lands, did not represent a loan, Cattanach J. stated (at p. 6368):

The essence of a loan is that the advance shall be repaid. The agreements provided that nothing there shall be construed as creating a personal liability on Amoco to repay the principal sum advanced and interest thereon but that the plaintiff for its reimbursement shall look exclusively to the petroleum substances to the extent of Amoco's share therein which was assigned the plaintiff.

Words and Phrases
loan

Canada Deposit Insurance Corp. v. Canadian Commercial Bank, [1992] 3 S.C.R. 558

A syndicate including the Canadian Deposit Insurance Corportion and six major Canadian banks agreed to provide financial support to Canadian Commercial Bank ("CCB") by advancing $255 million to CCB for undivided interests by way of participation in a portion of a portfolio of assets held by CCB, with the right to receive from CCB on a proportionate basis the money recovered on those assets as well as a specified percentage of CCB's pre-tax income, until such time as the money advanced had been repaid, and with the further right in certain circumstances to receive warrants to acquire treasury shares of CCB representing approximately three-times the number of common shares currently outstanding.

The full amount advanced qualified as a loan (with the warrants as an equity sweetener), rather than as an equity investment. Accordingly, the syndicate's claim under the loan ranked equally with the claims of CCB's other unsecured creditors. Although the participation agreements had some aspects of equity, of particular relevance to their debt character was that CCB was legally obligated to repay $255 million and no more to the syndicate members.

Words and Phrases
loan

Cooper v. The Queen, 88 DTC 6525, [1989] 1 CTC 66 (FCTD)

interest-free loan recognized as obligation rather than benefit

The taxpayer, who was a residuary beneficiary and executor of his mother's estate, was held not to have received a benefit by virtue of an interest-free $400,000 loan made to him by the executors for the purpose of buying himself a home. Rouleau, J. was influenced by the fact that specific legislation dealing with interest-free loans (section 80.4) made no reference to loans made by a trust, and also noted (at p. 6535) that "Any loan which escapes inclusion into income under subsection 15(2) must be understood to have escaped entirely whether interest-free or not, otherwise the purpose of the section is in part defeated."

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality income tax consequences attaching to illegal loan 75
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) interest-free loan 102