25 June 1998 External T.I. 9725635 - SHAREHOLDER LOANS

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:

Shareholder loan and 15(2) and the draft legislation

Position:
	Related to a fact situation, gave general opinion on draft legislation as in its current 	form

Reasons:

Question of fact whether loan is received in capacity as shareholder or employee

XXXXXXXXXX 		972563
M. P. Baldwin
Attention:  		XXXXXXXXXX 

June 25, 1998

Dear Sirs:

Re: Interpretation of proposed subsection 15(2.4) of the Income Tax Act

This is in reply to your letter of September 23, 1997 requesting an interpretation of a pending amendment to subsection 15(2) of the Act and in particular to paragraph 15(2.4)(e) of the Income Tax Act (the "Act"). We apologize for the delay in responding to you.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

Pursuant to draft legislation, proposed subsection 15(2) of the Act requires that certain shareholder indebtedness be included in computing the income of such shareholders in the year in which the indebtedness arose. Proposed subsection 15(2.4) of the Act provides exceptions to the rule in proposed subsection 15(2) of the Act in respect of certain loans to shareholders who are also employees. Subject to proposed paragraphs 15(2.4)(e) and (f) of the Act, proposed paragraph 15(2.4)(a) of the Act provides an exception for loans or an indebtedness of an employee who is not a specified employee as that term is defined in subsection 248(1) of the Act.

A "specified employee" of a person is defined as an employee of the person who is either not dealing at arm's length with the person or who is a specified shareholder of the person. A "specified shareholder" of a corporation means a taxpayer who owns, directly or indirectly, not less 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation.

Even though the individual may not be a specified shareholder of the corporation at the time the loan or indebtedness arose, the individual may nevertheless be a specified employee at that time. This could be the case if, at that time, the individual is not dealing at arm's length with the corporation. Paragraph 251(1)(b) of the Act provides that it is a question of fact whether persons not related to each other are, at a particular time, dealing with each other at arm's length.

In the event that the individual was not a specified employee at the time the loan or indebtedness arose, the exception in proposed subsection 15(2.4)(a) of the Act would apply to prevent the application of proposed subsection 15(2) of the Act subject to the application of proposed paragraphs 15(2.4)(e) and (f) of the Act.

Whether or not a loan made by a corporation to an individual could be considered to be received by the individual in his/her capacity as an employee or as a shareholder or a person connected with a shareholder, involves a finding of fact in each case. However, in our view the person receiving the loan from, or becoming indebted to, a corporation must be a shareholder of the particular corporation or be connected with a shareholder of the particular corporation when the loan was made or the indebtedness arose.

The Department takes the position that where a public corporation makes a loan to a shareholder or a person connected to a shareholder in his/her capacity as an employee rather than as a shareholder, on the same terms and conditions as to other employees who are not shareholders, the loan would be considered to be a loan received by virtue of one's office or employment rather than one's share-holdings. However, the situation could be different where the individuals are shareholders in a private corporation. For example, where the sole shareholder, director, officer, and employee of a corporation wishes to obtain a loan from the corporation because of his/her employment that fits within the draft paragraphs 15(2.4)(b), (c), and (d), the Department will generally consider a loan to be received by virtue of employment where an employee-shareholder can show that employees with similar duties and responsibilities to another employer of similar size, but who are not shareholders of that other employer-corporation, receives loans of similar amounts under similar conditions as that granted to the employee-shareholder. As a further comment, we note that where a particular benefit is available only to shareholders or persons connected with a shareholder, there is a presumption that the benefit is made to the individual in his/her capacity as a shareholder.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch