Principal Issues: Whether the assignment of a shareholder debt from one corporation to another results in a new loan under 15(2).
Position: No. Just the assignment of an existing loan to another corporation does not result in a new loan or indebtedness.
Reasons: The paragraph 15(2.4)(b) exception to subsection 15(2) of the Act refers to the creditor/debtor relationship that exists at the time of the issuance of the loan. A subsequent assignment of a loan to another person does not result in a new loan. Therefore, it is our general view that a loan that was previously exempted from the application of subsection 15(2) of the Act, because of paragraph 15(2.4) (b), would continue to be exempt as long as the original loan remains outstanding.
2005-012955 XXXXXXXXXX Charles Rafuse 613-957-8967 June 21, 2005
Dear XXXXXXXXXX:
Re: Shareholder Debt
This is in reply to your letter of May 3, 2005, concerning the application of subsection 15(2) and 15(2.4) of the Income Tax Act ("the Act").
Specifically, you have presented an example where a corporation (Lendco) makes a loan to one of its employee/shareholders for the purposes of acquiring a dwelling. The loan meets the requirements of subsection 15(2.4) so it would not be included in the recipient's income for the year. In a later year, Lendco assigns the remaining balance of the loan to another related corporation (Assignee) or amalgamates with another corporation. You have asked whether the assignment or amalgamation will result in a new indebtedness of the taxpayer to the Assignee or amalgamated corporation such that subsection 15(2) would apply and the provisions of subsection 15(2.4) would have to be met to exclude the loan from income. The taxpayer may or may not be an employee of the Assignee.
Our Comments
The paragraph 15(2.4)(b) exception to subsection 15(2) of the Act refers to the creditor/debtor relationship that exists at the time of the issuance of the loan. A subsequent assignment of a loan to another person does not in itself result in a new loan. This would be the case as long as all the terms and conditions of the loan remain unchanged. Therefore, it is our general view that a loan that was previously exempted from the application of subsection 15(2), because of paragraph 15(2.4)(b), would continue to be exempt as long as a novation of the original loan does not occur. Accordingly, it is our view that in the example that you have presented, where there are no changes to the terms of the loan, the loan that originally met the conditions of paragraph 15(2.4) would continue to do so. However, our opinion may be different in a situation where the shareholder did not keep making the loan payments.
Thank you for pointing out the inconsistencies in our old letters and we will update our database to reflect our current views.
We trust this information is helpful.
Yours truly,
Charles Rafuse
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch