Principal Issues: Whether money advanced to a shareholder to pay a personal loan is included in income under 15(2) of the Act?
Position: Question of fact, but likely yes.
Reasons: The exceptions to the application of subsection 15(2) of the Act do not apply. in this specific fact situation.
XXXXXXXXXX
2010-037562 P. Waugh
September 17, 2010
Dear XXXXXXXXXX :
Re: Shareholder Loan Benefit
I am writing in response to your letter of July 20, 2010 concerning the taxation of a shareholder loan benefit received from a corporation. More specifically, you have enquired whether money advanced to a shareholder by a corporation to pay a personal loan is required to be included in income.
In the situation you described, the taxpayer is the sole shareholder in a corporation which is applying for bank financing by pledging the corporation's assets as collateral. The bank handling the application also wants to obtain additional collateral for its loan in the form of land that is owned and registered personally to the sole shareholder. In order to secure the land, the bank will have to pay out an existing loan on the land that the shareholder has with a separate finance company. Rather than arrange a separate loan with the shareholder to repay the current finance company for the land loan, the bank is proposing that the corporation use some of the new loan proceeds to pay off the personal land loan. This will create a shareholder receivable in the corporation's books larger than the amount of the existing balance of the shareholder payable account.
Our Comments
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.
The purpose of subsection 15(2) of the Income Tax Act (the "Act") is to include in a shareholder's income, amounts received from a corporation in the guise of loans or other indebtedness, with specific exceptions provided in law. Loans that are not subject to an income inclusion under subsection 15(2) of the Act may still give rise to an interest benefit included in income pursuant to subsection 15(9) where no interest or a low rate of interest is charged. We refer you to Interpretation Bulletin IT-421, Benefits to Individuals, Corporations and Shareholders from Loans or Debt, for further information in this regard.
If a taxpayer can establish that a loan falls within the provisions of one of subsections 15(2.2) to (2.6), the amount of the loan or indebtedness will not have to be included in income under subsection 15(2) of the Act. It is a question of fact whether a taxpayer would meet one of the provisions exempting an income inclusion under subsection 15(2) of the Act. For example, paragraph 15(2.4)(b) may exempt a loan to a shareholder who receives a loan in his capacity as an employee to enable him to acquire a dwelling.
Based on the limited information provided in this situation, it appears that the loan in question would not fall within any of these exceptions and the amount of loan owing to the corporation would be required to be included in the taxpayer's income under subsection 15(2) of the Act. Further information on these exceptions can be found in Interpretation Bulletin IT-119R4, Debts of Shareholders and Certain Persons Connected With Shareholders. This bulletin also explains deductibility by the shareholder of a repayment under paragraph 20(1)(j) of the Act.
We trust these comments will be of assistance.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch