Principal Issues: Where a corporation guarantees the loan of a shareholder of the corporation, whether the corporation has conferred a benefit on the shareholder?
Position: It is a question of fact.
Reasons: We have no firm guidelines as to when we will assess a benefit.
CRA PUBLICATIONS: question 62 of the 1986 CTF Revenue Canada Round Table; question 24 of the 1991 CTF Revenue Canada Round Table; question 41 of the "Insights Into The 1991 Revenue Canada Round Table Discussion"; question 6 of the 1992 Manitoba Round Table; question 15 of the 1990 APFF.
CALU - Conference for Advanced Life Underwriting (2006)
Question 14
Loan Support and Shareholder Benefits
The CRA has made a number of statements over the years regarding the application of the shareholder benefit rule in subsection 15(1) where a shareholder of a private corporation borrows money from a financial institution, and the corporation guarantees the loan or provides security for it (e.g., a mortgage over corporate property, or a collateral assignment of a corporate-owned life insurance policy). In these statements, the CRA has identified factors that it considers relevant in determining if the corporation has conferred a benefit on the shareholder. These factors include: (i) whether the shareholder deals at arm's length with the corporation; (ii) whether there is evidence that the shareholder is unable to repay the loan when the corporation provides the support for the borrowing; and (iii) whether the shareholder is required to pay a reasonable fee to the corporation for providing the guarantee or security.
Question:
(a) What is the CRA's current position with respect to shareholder benefits when a corporation provides a guarantee or security as described above?
(b) Specifically, in what circumstances will the provision of the guarantee or security result in a benefit and in what circumstances will there be a benefit if the lender realizes on the guarantee or security?
Agency's Response
Where a shareholder of a corporation borrows money ("Loan") from a financial institution and the corporation guarantees the Loan and /or provides security as collateral to the Loan ("Guarantee"), the determination of whether or not the corporation has conferred a benefit on the shareholder can only be made following a review of all of the circumstances of a particular situation. We have no firm guidelines as to when we will assess a benefit. However, we will not assess a benefit in the situation where the shareholder is dealing at arm's length with the corporation and there is no evidence that the shareholder is, at the time the Guarantee is granted, unable to repay the Loan. This position was previously stated in the response to question 62 at the 1986 CTF Revenue Canada Round Table, question 24 at the 1991 CTF Revenue Canada Round Table and question 41 at the "Insights Into The 1991 Revenue Canada Round Table discussion" which was sponsored by the Institute of Chartered Accountants of Ontario and held as part of the Bottom Line Trade Show in Toronto on July 29, 1992.
In the situation where the shareholder pays a reasonable fee to the corporation as consideration for the granting of the Guarantee, the Guarantee would not, in and by itself, give rise to a benefit. This position was previously stated in the response to question 6 at the 1992 Manitoba Round Table.
In the situation where the corporation is called upon to honour the Guarantee, any payments that the corporation makes to the financial institution to fully discharge its obligation under the Guarantee, including the security realized by the financial institution, would generally constitute a benefit conferred on the shareholder under subsection 15(1). However, any amounts that the corporation recovered from the shareholder will reduce the benefit. This position was previously stated in the response to question 62 at the 1986 CTF Revenue Canada Round Table, question 15 at the 1990 APFF and question 6 at the 1992 Manitoba Round Table.