March 5, 1991
19(1)
We are writing in reply to your letter of November 29, 1990, wherein you requested our views regarding the interpretation of the Income Tax Act (the "Act") as it applies to corporate loans to shareholders and employees.
In particular, you requested our views as to whether or not subsection 15(2) of the Act would apply to the various loan situations described in your letter.
As discussed during our telephone conversation of February 20, 1991, the Department does not provide definitive replies to the type of factual situation described in your letter without first having had the opportunity to review all relevant facts and related documentation. Such a review would normally be carried out by the District Taxation Office in which the taxpayers file their income tax returns.
The following comments are of a general nature only.
Our Comments
Whether or not a loan made by a corporation to an individual could be considered to be received by the individual in his/her capacity as an employee or as a shareholder would involve a finding of fact in each particular case. The Department has taken the position that where a public corporation makes a loan to a shareholder in his/her capacity as an employee rather than as a shareholder, on the same terms and conditions as to other employees who are not shareholders, the loan would be considered to be a loan to an employee rather than a shareholder. However, the situation could be different where the individuals are shareholders in a private corporation.
Subsection 15(2) of the Act applies only where, at the time of the transaction, a shareholder receives the loan or incurs the indebtedness in his/her capacity as a shareholder. As stated in paragraph 13 of IT-119R3. "The exceptions in subparagraphs 15(2)(a)(ii) to (iv) apply only where a specific loan was made or specific indebtedness arose for a qualified purpose and is used for that qualified purpose." As a consequence, where existing arms-length loans, incurred by a shareholder, are replaced by corporate loans to the shareholder the corporate loans will not fulfil the requirements of subparagraphs 15(2)(a)(ii) to (iv) of the Act. This is because the corporate loans merely replace existing loans or debt and cannot be considered to be used for the specific purposes set out in the Act.
We trust our comments are of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch