Principal Issues: 1. Whether the guarantee fee is deductible in computing the income of the shareholder in the situation described in the question. 2. In a given situation, whether a guarantee fee received by a corporation from a shareholder is an income from a property or a business income. 3. Whether subsection 15(1) is applicable in the situation described in the question.
Position: 1. Deduction under paragraph 20(1)(e) or 20(1)(e.1) (but also subject to the possible application of subsection 18(9)). 2. It is a question of fact but generally would be considered as a business income. 3. Question of fact, but in general no for the granting of the guarantee (in and by itself).
Reasons: 1. Wording of paragraph 20(1)(e) or 20(1)(e.1) and previous positions. 2. Previous positions. 3. Previous positions.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2022
2022 APFF CONFERENCE
5. Tax treatment of a guarantee fee in the context of the use of a building of a corporation as security for a personal loan
An individual, the sole shareholder of a corporation, takes out a personal loan of money in order to earn business or property income (other than property whose income would be exempt). To secure his personal loan, his corporation grants a mortgage on a building it owns. The shareholder makes all principal and interest payments on this personal loan. In addition, the individual pays the corporation a reasonable guarantee fee.
Questions to the CRA
(a) Can the shareholder deduct in computing income the amount as a reasonable guarantee fee paid to the corporation where the borrowed money is used by the individual to earn income from a business or property?
(b) Does the reasonable guarantee fee received by the corporation constitute taxable income from an active business or income from property of the corporation?
(c) Since the shareholder is paying a reasonable guarantee fee, could you confirm that the shareholder will not be taxable on a benefit pursuant to subsection 15(1)?
CRA Response to Question 5(a)
It must first be determined whether the guarantee fee is an expenditure of a current nature or an expenditure of a capital nature coming within paragraph 18(1)(b). The facts submitted do not allow us to make a definitive statement in this regard. However, in such a situation, the guarantee fee would generally be a capital expenditure. Therefore, for the purposes of the following comments, we have assumed that the guarantee fee is a capital expenditure.
An amount payable by a taxpayer (other than a payment specifically excluded by paragraph 20(1)(e.1), e.g. a payment that is computed by reference to profits) as a guarantee fee in a taxation year is deductible pursuant to paragraph 20(1)(e.1), where it can reasonably be regarded as relating only to the year and the taxpayer incurs it for the purpose of borrowing money to be used by the taxpayer for the purpose of earning income from business or property (other than money that the taxpayer uses for the purpose of acquiring property the income from which would be exempt).
Paragraph 20(1)(e.1) would not apply in the situation described above if the guarantee fee is a one-off amount paid at the time the loan is granted for the duration of the loan and the loan has a term of a number of years.
In a situation such as described above, a reasonable one-time guarantee fee (other than an "excluded amount" as defined in subparagraph 20(1)(e)(iv.1)) paid respecting the term of the loan would generally be deductible pursuant to paragraph 20(1)(e), taking into account the application of subsection 18(9), if applicable.
CRA Response to Question 5(b)
Where a taxpayer receives a guarantee fee in a situation such as that described in the question, the CRA generally considers that the guarantee fee is received for a service. This position is supported in particular by The Queen v. Audet [14] where the Federal Court concluded that the amount received for the endorsement of a note was received for a service.
Whether the provision of a service, such as the giving of a guarantee, constitutes a "business" within the meaning of subsection 248(1) is, however, a question of fact that can only be resolved after an examination of all the relevant facts of a particular situation.
Subsection 248(1) provides an extended meaning to the concept of "business" by defining it as including activities of any kind:
“[B]usiness includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment.”
The Federal Court of Appeal held in Timmins v. The Queen, [15] that the provision of services under contract for a fee may be a business within the meaning of subsection 248(1) by virtue of being an undertaking of any kind whatever:
"[12] Applying this definition, it seems clear that even if it could be said that the Department was not carrying on a business in the ordinary sense, it was at least engaged in an “undertaking of any kind whatever,” namely the provision of services under a contract for a fee. As such it was carrying on business under a contract as contemplated by ss. 8(10) and 122.3(1)."
Furthermore, in Audet, [16] the Federal Court specifically found that the giving of a guarantee is a business within the meaning of subsection 248(1) by being an undertaking of any kind whatever [TaxInterpretations translation]:
"[12] The act of endorsement, of taking a risk, is in my view an undertaking, even if there is no consideration attached to the service. If there is consideration attached to the endorsement, in my opinion the profit from it is that of a business as that term is described in section 139(1)(e) [(now defined in section 248(1)]."
Where a taxpayer's activity constitutes a "business", the second stage is determining whether that business is "carried on". In this regard, the Federal Court of Appeal commented on the term "carrying on a business" in Timmins [17] as follows:
“[9] The expressions “carry on business,” “carrying on business” or “carried on business,” while undefined must, when regard is had to the ordinary meaning of the words refer to the ongoing conduct or carriage of a business. It would seem to follow that where one “carries on” a business in the ordinary sense or by pursuing one or more of the included activities under ss. 248(1) over time, one is “carrying on business” under the Act”.
However, the question of whether a business is carried on remains a question of fact that can only be resolved after an examination of all relevant facts.
CRA Response to Question 5(c)
The question of whether subsection 15(1) could apply can only be resolved in light of all the relevant facts and circumstances of a particular situation. The facts presented in the situation described above do not appear to us to be sufficient for the CRA to be able to confirm that the shareholder would not be taxable on a benefit pursuant to subsection 15(1).
However, the CRA would not generally apply subsection 15(1) solely as a result of the granting of a guarantee where the CRA is of the view that the individual pays the individual’s corporation a reasonable guarantee fee as consideration for the individual’s corporation granting a mortgage guarantee of a personal loan of the individual.
Robert Gagnon
October 7, 2022
2022-093630
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 78 D.T.C. 6554 (F.C.T.D.) ("Audet").
2 [1999] 2 F.C. 563 ("Timmins").
3 Audet, supra, note 14, para. 12.
4 Timmins, supra, note 15, para. 9.