10 July 1990 Ministerial Correspondence 901134 F - Housing Loans

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.

July 10, 1990

Dear Sirs:

Re:  Housing Loans

This is in reply to your letter of June 13, 1990 and further to our telephone conversation of June 27, 1990 (Thornley /19(1) regarding the application of subsection 15(2) of the Income Tax Act (the "Act") to the following hypothetical situation:

(a)     A taxpayer is to purchase a residential property with an existing structure on it which he intends to demolish,

(b)     The existing house will be rented out for approximately one year when monies will be available for construction of a new home,

(c)     Funds will be provided to the taxpayer from a corporation of which he is a shareholder and employee to assist in the construction of a dwelling for his habitation.

You ask if a loan made in the above circumstances will qualify as a housing loan for purposes of subsection 15(2) of the Act.

The determination of whether a particular loan is an exclusion contemplated by subparagraph 15(2)(a)(ii) of the Act must be made on a case by case review based on all the relevant facts of the situation.

Such determinations are generally made by District Taxation Office personnel.  We do, however, make the following comments based on the limited information in your letter.

Our Comments

The Department's position with respect to shareholder loans is contained in Interpretation Bulletin IT-119R3.  Paragraphs 16, 17 and 18 deal specifically with the issue of whether a loan has been made to enable or assist a shareholder/employee to acquire a dwelling for his habitation.

Providing the loan meets the conditions outlined in these paragraphs and the property in your example was not principally acquired for the purpose of gaining or producing income therefrom, and this is a question of fact, rental income earned in the circumstances of your example would probably be considered incidental income.  Thus, in view of the foregoing and taking into consideration the comments that follow, a loan received in the hypothetical circumstances of your example would probably come within the exception in subparagraph 15(2)(a)(ii) of the Act.

As discussed over the telephone, the employee must meet all the conditions in subparagraph 15(2)(a)(ii) of the Act to insure that the amount of the loan received from his corporation is not included in computing the income for the year of the employee.  Subparagraph 15(2)(a)(ii) specifically states that the employee must " ... acquire a dwelling for his habitation".  Thus there should be some correlation between the acquisition of the dwelling and the habitation of the dwelling by the employee. Where possible this should take place in the year, or very soon after the year, in which the loan is obtained.

Please note that loans made or indebtedness arising in respect of repairs, alterations, renovations or additions made to a dwelling are not considered to qualify for the exception under subparagraph 15(2)(a)(ii) of the Act.  The Department also considers that a loan made or indebtedness arising for the purpose of refinancing a dwelling is not to enable or assist the borrower to acquire a dwelling.

As indicated, the foregoing comments are an expression of our opinion only.  As such they do not constitute an advance income tax ruling and are not binding on the Department.

We trust that we have replied adequately to your question.

Yours truly

for DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch