Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
whether "to be held by the employee for the employee's own benefit" as found in 15(2)(a)(iii) implies a one-time test to be met in the year the loan is received only or whether the phrase implies a continuous condition to be met throught the term of the loan
Position TAKEN:
Department's position is that the phrase requires and is intended to require that the employee hold the shares for the employee's own benefit for the duration of the loan period
Reasons FOR POSITION TAKEN:
reflects position in Legislation Branch memo 83-8 dated September 15, 1983 and position also reflects intent of the legislation as confirmed by officials of the Department of Finance
940503
XXXXXXXXXX Sandra Short
Attention: XXXXXXXXXX
January 9, 1995
Dear Sirs:
Re: Subparagraph 15(2)(a)(iii) of the Income Tax Act
This is in reply to your letter of February 23, 1994 which requests a technical interpretation concerning the phrase "to be held by the employee for the employee's own benefit" as found in subparagraph 15(2)(a)(iii) of the Income Tax Act (the Act). We apologize for the delay in responding to you. You have asked that we consider the following hypothetical situation:
1.an individual is the sole shareholder of a corporation ("Holdco") that is connected with the particular corporation ("Corp.");
2.the individual is an employee of Corp.;
3.the individual receives a loan from Corp. in a taxation year to enable him to acquire previously unissued fully paid shares of the capital stock of Corp.;
4.bona fide arrangements are made at the time the loan is made for repayment of the loan within a reasonable time;
5.these newly issued shares of Corp. are initially held by the employee but are transferred in a subsequent taxation year under subsection 85(1) of the Act to Holdco in exchange for share consideration.
Specifically, you enquire whether the condition that the employee hold the shares for the employee's own benefit is a one-time test to be met only during the taxation year in which the loan is received, or is a continuous condition to be met throughout the term of the loan. It is your view that the one-time test is the appropriate interpretation, as the provisions of subsection 15(2) of the Act apply where "in a taxation year" an individual receives a loan. In a subsequent year, no loan is received. You have also asked that, in the event that the provisions of subsection 15(2) of the Act imply a continuous test, whether the individual is required to include the loan in income for the year in which the shares are transferred or the year in which the loan is granted.
It is our position that the phrase "to be held by the employee for the employee's own benefit" requires and is intended to require that the employee hold the shares for the employee's own benefit for the duration of the loan period. In order to come within the exceptions in paragraph 15(2)(a), the borrower or debtor must be able to establish that the loan or debt comes within the provisions of one of subparagraphs 15(2)(a)(i) to (iv) and that bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time.
Question 17 of the 1993 Round Table addresses the question of bona fide arrangements in a situation where a home is sold in a subsequent taxation year without repayment of the loan principal to the employer. The question asked the Department was whether the loan continues to qualify as a home purchase loan notwithstanding that the home itself is no longer owned and no replacement home has been acquired. The Department replied to the question by stating that in order to be exempt from the application of subsection 15(2) of the Act in the year the loan is received, the borrower must establish that bona fide arrangements were made at the time the housing loan was made, for repayment within a reasonable time. We then reiterated that the bona fides of repayment terms are assessed by reference to normal commercial practices which would be found in similar circumstances. While a mortgage is not expressly required to establish bona fides, it would normally be viewed as unreasonable and inconsistent with normal commercial practice for a lender to loan a large sum of money without security or without a requirement to repay the loan when the property is sold. Similarly, in a situation where a corporate employer provides an employee with a sum of money for the purpose of acquiring shares of the capital stock of the corporation, we believe that normal commercial practice would stipulate that the employee pledge the shares as security for the loan and that the employee pay the loan upon the disposition of the shares by the employee. Hence, in our view, it is likely that a successful argument may be made that bona fide arrangements were not made, at the time the loan was made or the indebtedness arose, for repayment thereof within a reasonable time in any instance where the loan agreement does not require the employee to pledge the shares or to pay the loan upon the disposition of the shares.
Where subsection 15(2) of the Act applies to include an amount in respect of a loan in a taxpayer's income, the wording of that subsection dictates that the loan be included in income in the year that the loan was made or the indebtedness arose.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch
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