6 December 1995 Internal T.I. 9530380 - RULES RELATING TO A SHAREHOLDER-TO-BE

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:

s/h loan rules and whether rules apply where creditor is not a s/h until after the loan is made

Position:

current rules would not apply but Dept of Finance is reviewing the draft proposal to change these rules

Reasons:

DRAFT

Revenue Canada Roundtable
Tax Executive Institute Conference
December 6, 1995

Question No. XVI

LOAN TO A SHAREHOLDER/EMPLOYEE

Assume that X is a shareholder of Publico, a widely held taxable Canadian corporation, and that for all the years in question he is also an employee of Subco, a wholly owned Canadian subsidiary of Publico. In 1995, X disposes of all his shares of Publico. In 1996 (when X is no longer a shareholder of Publico), Publico makes a loan to X that is repayable in five years. Assume further that the conditions of the loan are such that, were subsection 15(2) of the ITA applicable, the exceptions provided under paragraph 15(2)(a) and (b) would not apply. In 1998, X purchases some shares of Publico while the 1996 loan from Publico remains outstanding. The loan is repaid in 2001.

Would Revenue Canada confirm that subsection 15(2) would not apply to include the loan in X's income in 1996 or any subsequent year? When the loan was granted by Publico to X in 1996, he was no longer a shareholder of Publico only an employee of Subco. Would the answer be different if X had been an employee of Publico rather than Subco?

Department's Position

Draft legislation was released by the Minister of Finance in April 1995 and included amendments to subsection 15(2) of the Act as well as new subsections 15(2.2), (2.3), (2.4), (2.5) and (2.6) which also relate to shareholder loans.

IT-119R3 is currently under revision; however, the revision is not expected to be completed until the April 1995 technical amendments have become law.

This question, simply put, is whether subsection 15(2) of the Act applies to the situation where the individual receiving the loan is not a shareholder of the corporation at the time the loan is made but becomes one shortly thereafter. Under the current legislation, subsection 15(2) of the Act does not apply if the individual is not a shareholder at the time the loan is made. Under the current wording of the draft amendments to this provision, the tax treatment applicable to this type of situation would appear to be unaltered. However, the Department of Finance is currently reviewing the draft legislation to ensure that its application to the myriad of situations under which a loan might be made is consistent with tax policy. This may well be one of the situations which Finance might consider in making any changes to the draft legislation before it is introduced as a bill.

Author: A. Humenuk
File: 953038
Date: November 28, 1995