| 19(1) | File No. 5-9420 |
| D. Yuen | |
| (613) 957-2111 |
April 17, 1990
Dear Sirs:
Re: Subsections 15(1) and 56(2) of the Income Tax Act (Canada) (the "Act")
We are writing in response to the above letter in which you requested our views on the application of subsections 15(1) and 56(2) of the Act in the following hypothetical situation.
1. An individual ("A") is the sole shareholder of two taxable Canadian corporations ("Subco 1" and "Subco 2"). Taxable Canadian corporation has the meaning assigned by paragraph 89(1)(i) of the Act.
2. Subco 1 loans or advances money or property to Subco 2 on an interest-free basis.
You have requested our position as to whether A would be considered to have received a benefit under subsection 15(1) or subsections 56(2) of the Act in the above situation. You have also asked whether our view would change if the shareholder was a taxable Canadian corporation ("Holdco"), a company controlled by A, and if there was interest charged on the loans or advances between Subco 1 and Subco 2. You have also requested our comments on the findings of the Court in the case of Helen Vice, in her capacity as Executrix of the Last Will and Testament of William J. Vine v. Her Majesty The Queen (89 DTC 5528) (the "Vine case").
Comments
Generally, it is the Department's position that subsection 15(1) of the Act will not be applied in respect of intercorporate loans arising in the course of carrying on the businesses of the two corporations. A determination that a benefit has been conferred on a shareholder as a result of intercompany loans, will depend on an examination of all the facts of the particular situation.
As the Courts have held that bona fide intercompany loans are not payments or transfers of property, it is our view that subsection 56(2) of the Act would not be applicable in the circumstances.
The interposition of Holdco in the above situation would not alter our views except that subsection 246(1) of the Act may be used to assess a benefit, if any, on A as the shareholder of Holdco.
Generally, the Department does not require that loans between resident corporations bear interest. Depending on the relevant facts and circumstances, the charging of an interest rate on an intercompany loan may or may not help determine if a benefit has been conferred in a particular situation. Loans between corporations are specifically excluded from the application of section 80.4 of the Act.
The Department has not yet determined a position on the decision in the Vine case. It is our view that in circumstances similar to those of the Vine case, subsection 15(1) of the Act would be applicable.
The comments expressed are not advance income tax rulings and are not considered binding on the Department in accordance with paragraph 24 of Information Circular 70-6R dated December 18, 1978.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch