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 a loan made to a sole shareholder-employee to facilitate the repayment of a secured line of credit used to finance a home purchase would qualify as a home purchase loan.
Position: Question of fact, but likely no.
Reasons: It is a question of fact whether any benefit, including a loan to purchase a dwelling, is conferred on an individual by virtue of employment or shareholdings.
XXXXXXXXXX 2011-040627
T. Baltkois
November 4, 2011
Dear XXXXXXXXXX :
Re: Sole Shareholder-Employee Home Purchase Loan
We are writing in response to your email dated May 11, 2011, in which you requested our comments concerning whether a loan made in 2011 by a corporation to its sole shareholder-employee to facilitate the repayment of a secured line of credit used to finance a home purchase in 2009 would be exempt from inclusion in the shareholder's income in the year the loan was made. You have also requested some clarification as to the rules pertaining to home purchase loans and the documentation that would be required to support such loans.
Our Comments
Subsection 15(2) of the Income Tax Act ("the Act") includes in an individual's income, loans received from a corporation of which the individual is a shareholder. If the individual can establish that a loan satisfies the conditions of one of subsections 15(2.2) to (2.6) of the Act, the amount of the loan will not be included in the individual's income under subsection 15(2) of the Act.
In the case of housing loans, the exception provided in paragraph 15(2.4)(b) of the Act and also paragraphs 15(2.4)(e) and (f) of the Act are particularly relevant. The exception in paragraph 15(2.4)(b) of the Act applies when a loan is made to the individual who is an employee of the lender to enable or assist the individual to acquire a dwelling. However, as stated in paragraph 18 of Interpretation Bulletin IT-119R4, Debts of Shareholders and Certain Persons Connected with Shareholders, dated August 7, 1998, "a loan made for the purpose of refinancing an indebtedness that was incurred earlier to acquire a dwelling is not considered to have been made to enable or assist an employee or an employee's spouse to acquire a dwelling. However there is an exception when commitments were made at the time of the acquisition, between the employee or the employee's spouse and the lender to the effect that the lender would provide the permanent financing. In determining whether such commitments were made, all relevant facts and evidence will be considered, including formal documentation of the commitment, the nature of the original financing which should have the characteristics of usual interim financing and the reasons why the lender did not provide the original financing".
Provided the loan satisfies the conditions of paragraph 15(2.4)(b) of the Act, it must also satisfy the conditions in paragraphs 15(2.4)(e) and (f) of the Act. Paragraph 15(2.4)(e) of the Act requires that it must be reasonable to conclude that an employee or an employee's spouse received the loan by virtue of 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. With respect to the terms of repayment and documentation required to support such a loan, the Act does not set out any specific requirements in this regard.
Whether the conditions set forth in paragraphs 15(2.4)(e) and (f) of the Act have been satisfied are always questions of fact to be determined on a case by case basis. Where a shareholder is the only employee of a corporation, the Canada Revenue Agency will generally consider a loan to be received by virtue of employment where a shareholder-employee can demonstrate that employees with similar duties and responsibilities with another employer of similar size, but who are not shareholders of that other employer-corporation, receive loans of similar amounts under similar conditions as that granted to the shareholder-employee.
If the loan is determined to have been received by virtue of the individual's employment, subsection 80.4(1) of the Act deems an individual to have received a benefit from employment with respect to the interest free or a reduced interest loan. The amount of the benefit is calculated as the difference between the interest actually paid by the employee and the interest computed at a prescribed rate on the outstanding balance of the loan. Where a loan qualifies as a "home purchase loan", additional rules also apply.
A "home purchase loan" is defined in subsection 80.4(7) of the Act as a loan received by an individual by virtue of employment that is used to acquire, or to repay a loan that was received or a debt that was incurred to acquire a dwelling for the individual or a related person. Where a loan is used to repay an existing loan or debt, it will not qualify as a "home purchase loan" unless the underlying loan or debt so repaid was used for the explicit purpose of acquiring a dwelling and would otherwise have qualified as a "home purchase" loan.
For purposes of computing the employment benefit for home purchase loans, the interest rate ceiling is fixed for periods of up to five years. The individual is also allowed the benefit of any lower rate where the prescribed rate later decreases below the prescribed rate in effect at the time the loan was received or the debt incurred. If the loan has a repayment term exceeding five years, subsection 80.4(6) of the Act deems a new home purchase loan to be received every five years. The employment benefit in respect of the new loan would be based on the prescribed rate of interest in effect at the time the new loan was deemed received.
We trust these comments will be of assistance to you.
Yours truly,
Nerill Thomas-Wilkinson
A/Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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