23 February 1998 External T.I. 9800515 - 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 Loans

Position: Question of fact - Gave general positions

Reasons:

XXXXXXXXXX 980051
M. P. Baldwin
February 23, 1998

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

This is reply to your letter of December 23, 1997 in which you request an income tax ruling concerning subsection 15(2) of the Income Tax Act (the “Act”).

The situation described in your letter is an actual fact situation and as noted in paragraph 22 of Information Circular 70-6R3 (copy enclosed), when a request for a technical interpretation relates to a specific proposed transaction, an advance income tax ruling rather than a technical interpretation must be requested. As discussed in our telephone conversation (Baldwin/XXXXXXXXXX) of February 5, 1998, the determination of whether a particular housing loan made by a corporation to an individual in the individual’s capacity as a shareholder or an employee involves a finding of fact that can only be determined from an examination of all the facts. Consequently, we can only offer the following general comments which are not binding on the Department. This response is provided based on the draft legislation with respect to subsection 15(2) of the Act and in particular paragraph 15(2.4)(e) of the Act, being passed into law in substantially the same form as proposed.

New draft subsection 15(2) of the Act requires that certain loans received by shareholders of a corporation or certain debts contracted by them be included in computing the incomes of these shareholders. In new subsection 15(2.4) of the Act, a series of exceptions to the inclusion of loans or debts is provided, and paragraph 15(2.4)(e) of the Act specifies that these exceptions apply only where it is reasonable to conclude that the employee received the loan or became indebted because of the employee’s employment and not because of the employee’s shareholdings. Accordingly, under the proposed amendments to subsection 15(2) of the Act, if a housing loan is received by virtue of the employee’s shareholdings of the corporation, the loan would be required to be included in income.

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 involves a finding of fact in each case. The Department takes the position that where a public corporation makes a loan 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 shareholdings. However, the situation could be different where the individuals are shareholders in a private corporation. Where a particular benefit is available only to shareholders, there is a presumption that the benefit is made to the individual in his/her capacity as a shareholder.

Where the sole shareholder, director, officer and employee of a corporation wishes to obtain an employee-loan from the corporation that fits within 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, receive loans of similar amounts under similar conditions as that granted to the employee-shareholder.

We trust that the above comments will be of assistance to you.

Yours truly,

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