| 921057 | |
| 24(1) | A. Payette |
| (613) 957-8953 |
Attention: 19(1)
May 19, 1992
Dear Sirs:
Re: Subsection 15(2) of the Income Tax Act (the "Act")
This is in reply to your letter of April 2, 1992 wherein you requested our technical interpretation of the application of subsection 15(2) of the Act to a hypothetical set of facts and confirmation that the administrative interpretation of the application of subsection 15(2) described in paragraph 7(a) of published Advance Tax Ruling TR-98 remains the administrative position of Revenue Canada.
The hypothetical fact situation is as follows:
1. Opco is a taxable Canadian corporation controlled by Holdco, another taxable Canadian corporation.
2. Mr. X is a senior executive of Opco who does not own any shares in Opco. Mr. X is unrelated to Opco or Holdco.
3. Opco makes a loan to Mr. X to provide him with the funds necessary to acquire from Opco treasury up to 10% of the issued and outstanding shares of Opco.
You would like to know whether the Department considers that subsection 15(2) of the Act would apply in respect of the loan to Mr. X if neither of the exemptions found in paragraph 15(2)(a) or 15(2)(b) were applicable.
Your opinion
While you mention it is arguable that subsection 15(2) of the Act can apply to a loan made to an individual while he is not a shareholder, but subsequently becomes a shareholder, you believe that this would not be consistent with the object and spirit of the section. You state that your interpretation is consistent with the position of Revenue Canada enunciated in TR-98 wherein it is stated that subsection 15(2) will not apply where loans are made to individuals in their capacity as employees rather than shareholders.
Our comments
Subsection 15(2) of the Act states, in part, that:
" Where a person (...) is a shareholder of a particular corporation, is connected with a shareholder of a particular corporation...and the person...has in a taxation year received a loan from or has become indebted to the particular corporation, to any other corporation related thereto..., the amount of the loan or indebtedness shall be included in computing the income for the year of the person..., unless
(...)"
We are of the opinion that, in order to trigger the application of subsection 15(2) of the Act, the person receiving the loan or becoming indebted to the corporation or related corporation must first be a shareholder of a particular corporation or be connected with a shareholder of a particular corporation. Generally, it is the Department's view that subsection 15(2) of the Act has no application to a loan received by an employee from a corporation in his capacity as an employee of the corporation and not as a shareholder, notwithstanding that the employee may thereafter become a shareholder of the corporation.
The Department's position on the possible application of subsection 15(2) where a loan is made to a shareholder but in his capacity as an employee of the corporation was stated at the 1986 Canadian Tax Foundation Conference:
"Where a public corporation makes a bona fide loan to a shareholder qua employee rather than qua shareholder, on the same conditions as to other employees who are not shareholders, it is Revenue Canada's policy to treat it as a loan to an employee rather than to a shareholder. The situation may be different for a shareholder of a private corporation than for a public corporation."
The Department's position in this respect has not changed. It is also a question of fact in each case as to whether or not a shareholder/employee received a loan qua employee.
These comments represent our general views with respect to the subject matter of your letter. The facts of a particular situation may result in a different conclusion. The foregoing comments are not rulings and, in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2, it is not binding on the Department.
We trust the foregoing is of assistance.
Yours truly,
J.A. Szeszyckifor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch