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Shareholder Loans - Meaning of "Series of Loans and Repayments" - by Paul Hickey 

Canadian Tax Adviser

 

October 23, 2012

 

Paul Hickey
Toronto, National Tax Centre

 

In a recent technical interpretation on shareholder loans, the CRA states that, in the phrase "a series of loans or other transactions and repayments" in subsection 15(2.6), a "series" occurs generally when repayment is made shortly before the corporation's year-end and then substantially the same amount is borrowed shortly thereafter in the immediately following year. Generally, a loan that forms part of such a series would be subject to the income inclusion rule under subsection 15(2).

Legislative background
Generally, a shareholder must include in income the amount of any loan received or indebtedness incurred from a corporation under subsection 15(2), unless the loan or indebtedness is specifically excluded through other provisions. A loan or indebtedness may be excluded from income if it is repaid within one year after the end of the taxation year (of the lender or creditor corporation) in which the loan was made or the indebtedness arose where it is established that the repayment was not part of "a series of loans or other transactions and repayments", under subsection 15(2.6).

 

Facts
A corporation with an August 31, 2010 year-end made a loan to the shareholder in the 2010 taxation year (i.e., the indebtedness arose during the period September 1, 2009 to August 31, 2010). In this situation, the shareholder would have until August 31, 2011 (i.e., one year from August 31, 2010) to make a repayment. Any part of the indebtedness that remains outstanding on September 1, 2011 will be brought into the shareholder's income under subsection 15(2) in the year in which the indebtedness arose. That is, the debt is potentially taxable in the shareholder's 2009 or 2010 taxation years depending upon when the original components of the indebtedness arose.

 

Issue
At issue is the meaning of "a series of loans or other transactions and repayments" under subsection 15(2.6).

 

CRA comments
In the TI, the CRA notes that its current position is that a "series" is generally restricted to a situation where a repayment is made shortly before the year-end of the corporation and the same amount, or substantially the same amount, is borrowed shortly thereafter in the immediately following year.

 

The CRA states that it is a question of fact whether a repayment made by the shareholder during the corporation's 2011 taxation year would be a "series" or whether the shareholder has specifically directed that the repayments should be allocated on a basis other than using it against oldest indebtedness first. However, assuming that neither of these situations applies, the CRA could consider shareholder repayments made in 2011 to be applied first against a 2010 indebtedness, and therefore no income inclusion would be required under subsection 15(2).

 

However, the CRA cautions that, where the indebtedness is not included under subsection 15(2), the shareholder would be subject to a taxable interest benefit calculated under section 80.4(2) for the number of days that the amounts remained owing each year.

 

For more information, contact your KPMG adviser.

 

 

 

 

 

Information is current to October 23, 2012. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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