Principal Issues: [TaxInterpretations translation] A corporation disposes of all the shares it holds in private and public corporations. With the proceeds, it wishes to make secured loans to its shareholders at the prescribed interest rate and to third parties at the market interest rate. Can these loans fall within the exception provided in subsection 15(2.3)?
Position: Question of fact. Insufficient information.
Reasons: It is necessary to determine whether the corporation carries on, on a regular basis, a business of lending money. It is also necessary to determine whether the loans to the shareholders are made at the same time as the corporation regularly carries on a money-lending business.
XXXXXXXXXX 2010-038521
May 9, 2011
Dear Madam,
Subject: Money-lending business
This is in response to your letter of October 27, 2010 in which you requested our opinion on the situation described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
In particular, you described a situation in which Mr., Mrs. and their children are shareholders of Corporation A. The latter is an investment corporation whose business activities have always consisted of the purchase and sale of shares of private and public corporations. Corporation A has sold all the shares it held in such corporations and, with the cash generated thereby, wishes to make secured loans to its shareholders at the prescribed interest rate and to third parties at the market rate, for initial terms of five years that would be renewable. For the purposes hereof, we have assumed that Corporation A did not carry on, on a regular basis, a business of lending money before making the loans to the shareholders.
You wish to have our comments on the following two questions:
(1) Will the loans to the shareholders be debt that arose in the ordinary course of the lender’s ordinary business of lending money for purposes of subsection 15(2.3)?
(2) If subsection 15(2.3) does not apply to the situation described above, will the Canada Revenue Agency apply the provisions of subsection 15(2)?
Our Comments
The situation you described in your letter appears to be related to a factual situation that concerns a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is our practice not to issue a written opinion on proposed transactions otherwise than by way of advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments, which we hope will be helpful.
Where a shareholder or a person connected with a shareholder of a corporation has received a loan from or has become indebted to the particular corporation, subsection 15(2) applies such that the amount of the loan or indebtedness is included in computing the income for the year of the shareholder or person with whom the shareholder is connected.
Subsection 15(2.3) provides that subsection 15(2) does not apply to a debt that arose in the ordinary course of the creditor’s business or a loan made in the ordinary course of the lender’s ordinary business of lending money where, at the time the indebtedness arose or the loan was made, bona fide arrangements were made for repayment of the debt or loan within a reasonable time.
The question of whether a loan is made in the ordinary course of the lender’s ordinary business of lending money is a question of fact. However, Interpretation Bulletin IT-442R, Bad Debts and Reserves for Doubtful Debts, provides the following comments on this subject:
[...] [I]t is not sufficient merely that loans are made; they must be made as an integral part of a business operation. It is required that there be a certain system and continuity in the making of loans, and the purpose must not be the occasional investment of surplus funds, accommodation to friends or customers or advances that are intended to remain a part of the capital of the borrower.
In your request, you assumed that the principal business of Corporation A is to lend money to its shareholders and to third parties. However, before accepting the validity of such an assumption, we wish to ask the following two questions. First, does Corporation A carry on a money lending business on a regular basis? Second, was that business being carried on when the shareholder loans were made? Only when the shareholder loans are made while Corporation A is carrying on the ordinary business of lending money will subsection 15(2.3) apply.
Of course, at the time of the shareholder loans, bona fide arrangements must be made for repayment within a reasonable time.
Where subsection 15(2.3) does not apply to a loan made to a shareholder of a corporation, the amount of the loan shall be included in computing that shareholder's income.
We hope that the above comments will be of assistance.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate