16 December 2008 External T.I. 2008-0270201E5 - Sole shareholder-employee housing loan

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 to a shareholder-employee qualifies as a housing loan.

Position: Question of fact. The fact that an individual is the only employee and shareholder of a corporation does not mean, in and of itself, that a benefit is conferred qua employee.

Reasons: Whether any benefit, including a loan to purchase a dwelling, is conferred on an individual qua employee or qua shareholder is always a question of fact, which must be determined in each particular case.

XXXXXXXXXX 							2008-027020
S. deLang-Lenters
December 16, 2008

Dear XXXXXXXXXX :

Re: Housing loan to sole shareholder-employee

This is in response to your correspondence of February 25, 2008. You asked for our comments regarding whether a loan from a corporation to its shareholder-employee would qualify as a home purchase loan and be exempt from inclusion in the shareholder's income in the year of the transaction, because the shareholder is the sole employee of the corporation.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, general in nature and are not binding on the Canada Revenue Agency.

Our Comments

Statutory references are to the Income Tax Act (Canada).

Where the shareholder receives a loan from the corporation, the amount of the loan is considered to be a benefit and is included in computing the shareholder's income for the year under subsection 15(2), unless one of the exceptions in subsection 15(2.4) applies. The incident inquiry concerns our interpretation of the exception for a "home purchase loan" specified in paragraph 15(2.4)(b).

Subsection 15(2.4) excludes a home purchase loan from inclusion in a shareholder's income where:

• the shareholder is an employee of the corporation, and the loan is made to enable the individual to acquire a dwelling for the individual's habitation (paragraph 15(2.4)(b));
• it is reasonable to conclude that the home purchase loan was received because of the employee's employment and not because of any person's shareholdings (paragraph 15(2.4)(e)), and
• at the time the loan was made, bona fide arrangements were made for repayment of the debt within a reasonable time (paragraph 15(2.4)(f)).

The posed scenario seems to full the requirements of a "home purchase loan" save for the clarification requested regarding our interpretation of paragraph 15(2.4)(e). You believe it to be reasonable to conclude that the employee would be receiving the "home purchase loan" because of his employment and not because of his shareholding because he is the only employee.

In deciding whether a loan is received qua employee, the determinative factor is unlikely to be whether the recipient is the only employee. The fact that an individual is the only employee of a corporation does not mean, in and of itself, that a benefit is conferred qua employee. Rather, whether a loan to purchase a dwelling is conferred on an individual qua employee or qua shareholder is always a question of fact, which must be determined in each particular case.

Generally, a benefit will be considered to be conferred qua employee if it is reasonable to conclude that a benefit is conferred on an individual as part of a reasonable employee remuneration package. Where the shareholder is the only employee, the Agency will generally consider a loan to be received by virtue of employment where a shareholder-employee can show that employees with similar duties and responsibilities to 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 facts support that a "home purchase loan" is conferred qua shareholder, a benefit equal to the amount of the loan must be included in the shareholder's income for the year by virtue of subsection 15(2).

Alternatively, if the facts support that a "home purchase loan" is conferred qua employee, the amount of the loan will not be required to be included in the shareholder's income by virtue of the exception in subsection 15(2.4). However, subsection 80.4(1) may deem the individual to have received a benefit equal to the imputed interest on such loan at the prescribed rate for the period it was outstanding, subject to the rules specified in section 80.4.

We trust these comments will be of assistance.

Yours truly,

Nerill Thomas-Wilkinson
Acting Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch