Principal Issues: Whether subsections 15(1) or 246(1) apply to an interest-free loan between corporations having different shareholders?
Position: Depends on the particular facts and circumstances.
Reasons: Wording of the Act and previous positions.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 10 OCTOBER 2024
2024 APFF CONFERENCE
1. Inter-company loans and taxable benefits
The financing of private corporations can take various forms depending on the nature of the interest and the expected risk: participating shares, preferred shares, subordinated debt, shareholder's advance, etc. In addition, financing is also influenced by the availability of cash, its flow and its taxation.
Question to the CRA
Can you confirm the CRA's longstanding position that an interest-free loan between two corporations owned by different shareholders does not constitute a payment or transfer of property and that no transfer of value is generated by such loans? Consequently, no taxable benefit is generally triggered by the application of subsections 15(1) or 246(1) of the Income Tax Act. (footnote 1)
CRA Response
It should first be noted that in order to determine whether a benefit may result to a taxpayer from a particular situation, an examination of all the particular facts and circumstances relating to such a situation must be undertaken. In this respect, the facts described in the statement of the present question are very limited. Despite this, we can make the following general comments.
Subsection 15(1) essentially provides that the value of a benefit that a corporation confers, at a particular time, on a shareholder, a member of a partnership that is a shareholder of the corporation or a contemplated shareholder (within the meaning of the definition in paragraph 15(1.4)(a)) is to be included in computing the income of the shareholder, member or contemplated shareholder, as the case may be, for its taxation year that includes the time, except to the extent that the amount or value of the benefit is deemed by section 84 to be a dividend or that the benefit is conferred on the shareholder by means of one of the transactions described in paragraphs 15(1)(a) to 15(1)(d).
For the purposes of subsection 15(1), paragraph 15(1.4)(c) provides that a benefit conferred by a corporation on an individual is a benefit conferred on a shareholder of the corporation, a member of a partnership that is a shareholder of the corporation or a contemplated shareholder of the corporation — except to the extent that the amount or value of the benefit is included in computing the income of the individual or any other person — if the individual is an individual, other than an excluded trust in respect of the corporation, who does not deal at arm’s length with, or is affiliated with, the shareholder, member of the partnership or contemplated shareholder, as the case may be. Thus, subsection 15(1) could apply to the extent that it is established that a benefit is conferred by a particular corporation (“Aco”) on, for example, an individual who does not deal at arm's length with, or is affiliated with, a shareholder of Aco or its contemplated shareholder.
That said, our Directorate does not generally consider that a benefit is conferred under subsection 15(1) in the context of a bona fide inter-corporate loan made in the ordinary course of the corporations' business. Whether, in a particular case, a bona fide loan has been made by one person to another is a question of mixed fact and law. Subsection 15(1) could apply, for example, if at the time the loan is made by Aco, the other corporation (“Bco”) is unable to repay the loan and/or provide reasonable security, with the result that the value of Aco would be impaired.
In addition, in summary form subsection 246(1) provides where a person confers a benefit at any time, either directly or indirectly, by any means whatever, on a taxpayer, the amount of the benefit shall, to the extent that it is not otherwise included in computing the taxpayer’s income under Part I, be included in computing the taxpayer’s income or taxable income earned in Canada under Part I for the taxation year that includes that time, to the extent that it would be included in computing the taxpayer’s income if the amount of the benefit were a payment made directly by the person to the taxpayer.
Since the facts set out in this question are very limited, it is not possible to determine whether that last condition for the application of subsection 246(1) is satisfied. However, to the extent that it were determined that the shareholder of Bco and/or Bco would not have an interest in Aco (and, among other things, that the shareholder of Bco and/or Bco would not be shareholders or contemplated shareholders of Aco), it would appear that the last condition for the application of subsection 246(1) would not be satisfied. On that basis, subsection 246(1) would be inapplicable in the given situation.
Subsection 246(2) also limits the application of subsection 246(1) in certain circumstances. Specifically, where it is established that a transaction was entered into by persons dealing at arm’s length, bona fide and not pursuant to, or as part of, any other transaction and not to effect payment, in whole or in part, of an existing or future obligation, no party thereto shall be regarded, for the purpose of section 246, as having conferred a benefit on a party with whom it deals at arm's length. This exception obviously applies only if all the conditions are satisfied, and determining whether or not there is an arm's length relationship is a question of fact.
Finally, consideration should be given to the possible application of other provisions of the Income Tax Act, depending on the facts and circumstances of the particular situation, such as subsection 56(2), if it were otherwise determined that the loan was not made in good faith.
Nancy Charlebois
October 10, 2024
2024-102364
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 R.S.C., 1985, c. 1 (5th Supp.) (the "Act").