1. Where the security provided by the corporation may be used only for repayment of the arm’s length debt owing by the shareholder, will the shareholder be safe from such an income inclusion?
2. What if the shareholder has more than one borrowing from the same creditor, where the corporate assets secure all of the loans?
CRA responded:
[W]here a security interest in the assets of the company is tantamount to putting assets in the hands of the intermediary for its general use, the shareholder loan rules will ordinarily apply. Where, on the other hand, the security interest is a typical commercial security feature of an arm’s length lending arrangement, such that the assets that are the subject of the security can only be used to repay the debt and any accrued interest, the shareholder loan rules should generally not apply.
1. …[W]here a financial institution lends money on commercial terms to an individual that is a shareholder of a corporation, the corporation provides a security interest in its property to the lender, and such property can only be used in the event of default on the loan as a means of repaying amounts owing by the debtor under the lending agreement, then the security interest would not ordinarily be considered a “specified right”.
2. A security interest granted by a corporation to a creditor that may be used, in the event of default, to repay more than one debt owing by a shareholder of the corporation to that creditor would not, in and of itself, be considered to be a “specified right”.