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.
Principal Issues: Whether loan to employee/shareholder for purchase of home is included in income under 15(2) if bona fide arrangements for payment are made and prescribed interest rate is charged on the loan.
Position: Question of fact, but likely yes.
Reasons: It is a question of fact whether the exception to subsection 15(2), provided in paragraph 15(2.4)(b) would apply such that the employee/shareholder who received a loan in the taxation year to purchase a dwelling would not be required to include the amount in his or her income for the year under subsection 15(2). For the exception to apply under paragraph 15(2.4)(b) the requirements in paragraphs 15(2.4)(e) and (f), must both be met. In the particular case at issue, even if bona fide arrangements were made (at the time the loan was made) for repayment of the loan within a reasonable time - per paragraph 15(2.4)(f), it is not reasonable to conclude that the employee or the employee's spouse received the loan because of the employee's employment. The highest amount previously loaned out to an employee by the corporation is $10,000. The employee/shareholder plans to borrow $300,000 to $400,000 to acquire a new home in his existing neighbourhood.
Tim Fitzgerald, CGA
XXXXXXXXXX (519)973-7999 ext. 6509
2005-015906
February 20, 2006
Dear XXXXXXXXXX:
Re: Shareholder Loan
This is further to your email of November 15, 2005 wherein you requested information regarding the income tax treatment of a shareholder home purchase loan.
You described a situation where the taxpayer is an employee that owns 50% of a class of issued shares of the corporation (hereafter the "employee/shareholder"). The corporation is a manufacturing company and not in the business of lending money. You indicate that historically, the corporation has loaned money on occasion to its employees, provided cash flows permit, and that such loans have run as high as $5,000 to $10,000. The employee/shareholder is now contemplating whether to borrow $300,000 to $400,000 from the corporation to purchase a new house in the same neighbourhood in which he currently resides.
You asked whether the employee/shareholder would be subject to subsection 15(2) of the Income Tax Act (the "Act") if such a loan were made by the corporation for the purpose of the employee/shareholder acquiring a dwelling. You indicated that bona fide arrangements would be made between the parties for repayment of the loan in a reasonable time and interest would be charged by the lender at rates prescribed by the Income Tax Regulations.
The particular circumstance in your letter on which you have asked for our views concerns factual situations involving specific taxpayers. As explained in Information Circular 70-6R5 issued by the Canada Revenue Agency (the "CRA"), it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Although we are unable to provide any binding assurance with respect to the interpretations requested, we offer the following general comments for your information.
The purpose of subsection 15(2) of the Act is to include in a shareholder's income, amounts received from a corporation in the guise of loans or other indebtedness, with specific exceptions provided in law. Loans that are not subject to subsection 15(2) of the Act may give rise to a benefit included in income pursuant to subsection 15(9) if no interest or a low rate of interest is charged. We refer you to information bulletin IT-421 "Benefits to Individuals, Corporations and Shareholders from Loans or Debt" for further information in this regard.
If a taxpayer can establish that a loan falls within the provisions of one of subsections 15(2.2) to (2.6), the amount of the loan or indebtedness will not have to be included in income under subsection 15(2) of the Act. In the case you described, the exception provided in paragraph 15(2.4)(b) of the Act and also paragraph 15(2.4)(e) and (f) would be particularly relevant. The exception in subsection 15(2.4)(b) applies when the loan is made to an individual who is an employee of the lender or is the spouse of an employee of the lender to acquire a dwelling. For this exception to apply, paragraph 15(2.4)(e) of the Act further requires that it must be reasonable to conclude that the employee or the employee's spouse received the loan because of the employee's employment and not because of any person's shareholdings, and paragraph 15(2.4)(f) requires that at the time the loan was made, bona fide arrangements be made for repayment within a reasonable time.
It is a question of fact whether a particular loan or indebtedness arose as a result of a person's shareholdings or as a result of their office or employment with the crediting corporation. As we understand it in this case, no amount of loans previously granted by the corporation to its employees has ever exceeded $10,000. In contrast, the employee/shareholder, who holds 50% of an issued class of shares of the corporation, plans to borrow between $300,000 and $400,000 to purchase a new home in his existing neighbourhood. In such circumstances, even if bona fide arrangements were made for repayment within a reasonable time, we would generally consider the loan to have been granted to the employee/shareholder in his capacity as a shareholder rather than as an officer, director or employee of the corporation As such, the exception under paragraph 15(2.4)(b) of the Act would not apply, and the employee/shareholder would be required to include the loan in income pursuant to subsection 15(2).
IT-119R4 "Debts of Shareholders and Certain Persons Connected With Shareholders" discuss subsection 15(2) of the Act in detail. This bulletin and IT-421 can be found at our website by using the search tool on the following web page:
www.cra-arc.gc.ca/search/menu-e.html.
We trust our general comments are of assistance.
Yours truly,
Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative and Regulatory Affairs Branch
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