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:
Application of subsection 15(2.4) of the draft legislation issued by the Department of Finance in April 1995.
Writer concerned with the type of situation where a company advanced funds in instalments to an employee/shareholder (the individual) with respect to the construction of the individual's personal residence and has asked whether the advances on such a loan both before and after the announcement date of April 26, 1995 could be considered to be a loan made or indebtedness arising before April 26, 1995 such that paragraph 15(2.4)(e) of the proposed legislation would not be applicable.
In addition, if subsection 80.4(6) of the Act is applicable in a particular situation whether it would have any interaction with subsection 15(2.4) of the proposed legislation.
Position TAKEN:
Where an advance or instalment is received subsequent to April 25, 1995, albeit as a result of an agreement arrived at prior to April 26, 1995, any such advance or instalment received would not be considered to be a loan made or indebtedness which arose prior to April 26, 1995 and the provisions of new paragraph 15(2.4)(e) of the Act will be applicable.
Since the definition of "home purchase loan" in paragraph 80.4(7)(a) of the Act only refers to a loan described in subsection 80.4(1) of the Act, these provisions as well as subsection 80.4(4) of the Act would not be applicable to a loan made to an individual in his or her capacity as a shareholder. If the loan was made to the individual in his or her capacity as a shareholder, the loan would be subject to the provisions of subsection 80.4(2) of the Act. Accordingly, subsection 80.4(6) of the Act would have no application in the scenario presented.
Reasons FOR POSITION TAKEN:
Departmental position regarding loans or series or loans (9432435). Discussions with Legislative Policy and Finance.
952069
XXXXXXXXXX D. Zion
Attention: XXXXXXXXXX
October 19, 1995
Dear Sirs:
Re: Shareholder's loans
This is in reply to your letter of July 26, 1995 wherein you requested our views regarding the application of subsection 15(2.4) of the draft legislation issued by the Department of Finance in April 1995 dealing with proposed amendments to the Income Tax Act (the "Act").
You are concerned with the type of situation where a company advanced funds in instalments to an employee/shareholder (the individual) with respect to the construction of the individual's personal residence. You are of the view that prior to the draft legislation of April 1995 that all the advances would form a loan which would meet one of the exceptions contained in paragraph 15(2)(a) of the Act as it is now enacted. You have asked whether the advances on such a loan both before and after the announcement date of April 26, 1995 could be considered to be a loan made or indebtedness arising before April 26, 1995 such that paragraph 15(2.4)(e) of the proposed legislation would not be applicable. In addition, you have enquired whether or not, if subsection 80.4(6) of the Act is applicable in a particular situation whether it would have any interaction with subsection 15(2.4) of the proposed legislation.
We cannot confirm the tax consequences of a particular transaction without a thorough review of all relevant facts and documentation pertaining to the transaction. We are therefore not in a position to give you a definitive response. We will however, provide the following general comments which may be of assistance to you. This response is provided on the basis that the draft legislation is passed into law in substantially the same form as proposed.
The Department's general position with respect to shareholder loans is outlined in Interpretation Bulletin IT- 119R3. Paragraphs 16, 17, and 18 deal specifically with the issue of whether a loan has been made to enable or assist an individual to acquire a dwelling for his or her habitation. Where an individual obtains a loan from a corporation in connection with the acquisition of a vacant lot and the construction of a dwelling thereon, the loan would normally be provided to the individual in instalments as costs with respect to the dwelling are incurred. Whether a loan has been made by a corporation to an individual in the individual's capacity as a shareholder or an employee involves a finding of fact in each particular case. However, we also 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 or her capacity as a shareholder. We have assumed for the purposes of our discussion that the loan or series of loans were made to the individual in his or her capacity as a shareholder and on the basis that the loan satisfies all the requirements of subparagraph 15(2)(a)(ii) of the Act.
The explanatory notes which accompanied the April 26, 1995 draft amendments to the Act state that subsections 15(2) to 15(2.6) of the Act apply to loans made or indebtedness arising in the 1990 and subsequent taxation years, with the exception of new paragraph 15(2.4)(e) which requires that the loan be made to an employee because of the employee's employment and not because of the employee's shareholdings. This latter provision will not apply to loans made or indebtedness arising before April 26, 1995. Where an advance or instalment is received subsequent to April 25, 1995, albeit as a result of an agreement arrived at prior to April 26, 1995, it is our view that any such advance or instalment received would not be considered to be a loan made or indebtedness which arose prior to April 26, 1995 and the provisions of new paragraph 15(2.4)(e) of the Act will be applicable.
Generally, subsection 80.4(6) of the Act deems a new home purchase loan or home relocation loan to be received every five years where the repayment term of such loan exceeds 5 years. With respect to your enquiry, this subsection is applicable only for the purposes of the application of section 80.4 of the Act. We would point out that, since the definition of "home purchase loan" in paragraph 80.4(7)(a) of the Act only refers to a loan described in subsection 80.4(1) of the Act, these provisions as well as subsection 80.4(4) of the Act would not be applicable to a loan made to an individual in his or her capacity as a shareholder. If the loan was made to the individual in his or her capacity as a shareholder, the loan would be subject to the provisions of subsection 80.4(2) of the Act. Accordingly, subsection 80.4(6) of the Act would have no application in the scenario you have presented.
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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