19 June 1989 Ministerial Letter 57898 F - Employee Shareholder Housing Plan

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.

June 19, 1989

Dear Sirs:

Re:  Subparagraph 15(2)(a)(ii) of the Income Tax Act

We are writing in response to your letter dated April 13, 1989 in which you requested our opinion regarding the application of subparagraph 15(2)(a)(ii) of the Income Tax Act (the "Act") to the hypothetical situation described below.

FACTS

1.     Corporation A has previously made a bona fide loan to Mr. A, an employee and a majority shareholder of the corporation, to purchase a dwelling for his habitation.

2.     Corporation A proposes to make a bona fide loan to Mrs. A (the spouse of Mr. A) to purchase a second dwelling (a condominium in Florida) which will be inhabited by Mrs.A

3.     Mrs. A is neither an employee nor a shareholder of Corporation A.

QUESTIONS ASKED

You have asked us to consider the following questions in the context of the hypothetical situation described above:

1.     Will the loan to Mrs. A be a loan described in subparagraph 15(2)(a)(ii) of the Act?

2.     How would our response to question 1 be changed if Mrs. A was an employee but not a shareholder of Corporation A or if Mrs. A was both an employee and a shareholder of Corporation A, in each case, at the time the loan was made?

3.     Would that part of the loan that was used by Mrs. A to decorate and furnish the condominium after she has purchased the condominium be a loan described in subparagraph 15(2)(a)(ii) of the Act?

4.     If the condominium was decorated and furnished when purchased by Mrs. A and the decorations and furnishings were included in the purchase price, would the loan to Mrs. A that is used by her to pay the purchase price be a loan described in subparagraph 15(2)(a)(ii) of the Act?

5.     How would our responses to questions 3 and 4 above be changed if no part of the loan was used by Mrs. A to furnish the condominium or if the condominium was not furnished when purchased? 

In our responses to the last three questions, we have assumed that the loan to Mrs. A will otherwise be a loan described in subparagraph 15(2)(a)(ii) of the Act.

THE DEPARTMENT'S POSITION

The Department's position in respect of each of the questions you have asked is set out below with the response to each question being numbered in a corresponding manner.

1.     The loan to Mrs. A would have to be a loan made to Mrs. A as the spouse of Mr. A in his capacity as an employee of Corporation A and not as the spouse of Mr. A in his capacity as a shareholder of Corporation A in order for the loan to be a loan described in subparagraph 15(2)(a)(ii) of the Act.

     It is a question of fact whether or not the loan is made to Mrs. A as the spouse of an employee rather than as the spouse of a shareholder.  Because Mr. A is a majority shareholder of Corporation A and, hence, is in a position to influence the granting or terms of the loan, the Department would normally consider the loan to be a loan made to Mrs. A as the spouse of a shareholder and the loan would not be a loan described in subparagraph 15(2)(a)(ii) of the Act unless the loan is made to Mrs. A on the same terms and conditions as to spouses of employees who are not shareholders and who deal at arm's length with the shareholders of the corporation.

     You also describe the loan made to Mrs. A as being made to assist Mrs. A to acquire a dwelling that will be inhabited by Mrs. A.  However, in order for the loan to be a loan described in subparagraph 15(2)(a)(ii) of the Act, the loan must have been made to assist Mrs. A to acquire the dwelling for Mr. A's habitation.

     Whether the dwelling can be said to be used for Mr. A's habitation is a question of fact that can only be determined by reference to all of the relevant facts and circumstances of a particular case.  The legal definition of habitation does not preclude the possibility of two places of habitation.

     A dwelling will generally be considered to have been acquired for an individual's habitation provided that the individual "ordinarily inhabits" the dwelling, within the meaning of those words as set out in paragraph 9 of Interpretation Bulletin IT-120R3 dated February 16, 1984 issued by the Department, and provided, further, that the dwelling was not acquired principally for the purpose of gaining or producing income therefrom.

     Without further information as to the nature of the loan and the intended and actual use of the condominium by Mr. A, we are unable to express an opinion as to whether or not the loan in the hypothetical situation described above would be a loan described in subparagraph 15(2)(a)(ii) of the Act.

2.     If Mrs. A was an employee (but not a shareholder) of Corporation A, the loan would have to be made to Mrs. A in her capacity as an employee of the corporation and not in her capacity as the spouse of Mr. A, a majority shareholder of the corporation, in order for the loan to be a loan described in subparagraph 15(2)(a)(ii) of the Act. If Mrs. A was an employee and a shareholder of Corporation A, the loan would have to be made to Mrs. A in her capacity as an employee of the corporation and not in her capacity either as a shareholder of the corporation or as the spouse of Mr. A, a majority shareholder of the corporation, in order for the loan to be a loan described in subparagraph 15(2)(a)(ii) of the Act.

     Unless the loan is made to Mrs. A on the same terms and conditions as to other employees who are not shareholders and who deal at arm's length with the shareholders of the corporation, the Department would not consider the loan to be a loan made to Mrs. A in her capacity as an employee of the corporation.

3.     It is the Department's view that the part of the loan used by Mrs. A to furnish the condominium (that is, to acquire furniture, appliances and other items that are not "fixtures") would not be a loan described in subparagraph 15(2)(a)(ii) of the Act.

     It is also the Department's view that that part of the loan used by Mrs. A to decorate (rather than furnish) the condominium would not be a loan described in subparagraph 15(2)(a)(ii) of the Act except to the extent that, where the condominium acquired is not fit for habitation at the time of its acquisition, the cost of the decorations does not exceed the amount reasonably necessary to bring the condominium acquired into a state fit for habitation.

4.     If the condominium was decorated and furnished when purchased by Mrs. A and the decorations and furnishings were included in the purchase price, it is the Department's view that the loan used by Mrs. A to pay the purchase price would not be a loan described in subparagraph 15(2)(a)(ii) of the Act to the extent of the fair market value of the furnishings and the costs of upgrading, at Mrs. A's request or option, the standard decorations and finishes provided by the developer or the vendor of the condominium.

5.     If no part of the loan was used by Mrs. A to furnish the condominium or if the condominium was not furnished when purchased by Mrs. A, the Department's views expressed above in response to questions 3 and 4 would remain unchanged in so far as those views relate to the costs of decorations or the costs of upgrading the standard decorations and finishes provided by the developer or the vendor of the condominium.

These comments represent our general views with respect to the subject matter of your letter.  The facts of a particular situation may result in a different conclusion. The foregoing comments are not rulings and, in accordance with the guidelines set out in Information Circular 70-6R dated December 18, 1978, are not binding on the Department.

Yours truly,

T. Harrisfor Director,Reorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch