The rules in subsection 15(2) of the Income Tax Act operate to preclude the use of loans to shareholders to distribute corporate capital on a tax-free basis, by including the amount of the loan in the shareholder’s income. However, it may have been possible to avoid the application of subsection 15(2) to a particular loan where the corporation provides debt funding to a shareholder through one or more intermediaries to which the rules in subsection 15(2) do not apply. The 2016 federal budget introduced “back to-back” shareholder loan rules to ensure the application of subsection 15(2) in certain situations involving third-party loans. This article by Angela Ross, Ken Griffin and Jonathan Bright reviews these new rules in section 15 and in particular discusses their possible application to arrangements whereby a shareholder borrows money from a financial institution which is supported by the collateral assignment of a corporate owned insurance policy. This article is a must read for CALU members and other professional advisors who work with shareholders of private corporations in the implementation of leveraging strategies.
Topics covered in this report include:
- Application of Back-to-Back Shareholder Loan Rules
- Collateral Security Arrangements using Life Insurance