21 September 1990 External T.I. 9012775 F - Loan to Employees to Purchase Home

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.

September 21, 1990

Dear Sirs:

Re:  Subsection 15(2) of the Income Tax Act

This is in reply to your letter of June 11, 1990, wherein you requested our opinion on several issues relating to subsection 15(2) of the Act.  We will respond to your questions in the order in which they were posed.

1)     You asked for our views on the meaning of the term "dwelling for his habitation" as used in subparagraph 15(2)(a)(ii) of the Act.  It is your view that a loan to acquire property which is recreational or which is rented out during the periods not occupied would qualify for the exception in subparagraph (2)(a)(ii), provided it otherwise qualified.

     Whether dwelling is acquired for the purpose of the individual habitation is a question of fact which can only be determined by reference to all the relevant facts and circumstances of a particular case.  However a dwelling place, including a recreational property, 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 IT-120R3 and that the dwelling was not acquired principally for the purpose of gaining or producing income therefrom.

2.     You asked how much land can be included as part of the property which is a "dwelling for his habitation" as used  in subsection 15(2) of the Act.

     In determining whether a loan comes within the exemption provisions of subparagraph 15(2)(a)(ii) of the Act, it is our view that the term "dwelling for his habitation" includes only that portion of the land subject to and    contiguous to the dwelling which can reasonably be considered to be required for the use and enjoyment of the dwelling.  While the Department does not generally dispute the use and enjoyment of land which is less than 1/2 hectare, land in excess of 1/2 hectare will only be considered as part of the dwelling if it is established to be necessary for the use and enjoyment of that dwelling. Paragraph 12 of interpretation Bulletin IT-120R3 "Principal Residence" outlines some considerations used in determining whether land is necessary for the use and  enjoyment of a dwelling.

     In response to your specific question on whether an entire parcel of land can be included as part of the dwelling where there are municipal or provincial restrictions on the property, paragraph 14 of IT-120R3 states that severance restrictions are only relevant in respect of property which is zoned residential and which were in effect at the time of the subdivision was approved as well as at the time of acquisition and disposition.

3)     You described a case where a loan is made in circumstances where subsection 15(2) would apply if not for the exception described in subparagraph 15(2)(a)(ii) and where it is subsequently determined that a portion of the land contiguous to the dwelling is not part of the dwelling in that it is not required for the use and enjoyment of the dwelling.  You asked whether the entire loan would be subject to subsection 15(2) or whether the Department would accept that the proportion of the loan which is applicable to the house and the land which does qualify for the exception, would be exempt from the application of 15(2).

     As stated in paragraph 16 of IT-119R3, where the proceeds of the loan are in excess of the proportionate cost of the house and land that is reasonably required for the use and enjoyment of the house, the entire loan will be subject to the provisions of subsection 15(2) of the Act.

4.     Your last two questions concerned the meaning of the phrases "bona fide arrangements" and "a repayment within a reasonable time" as used in paragraph 15(2) (a) of the  Act.  Specifically you asked what time frame constitutes a reasonable period of time for repayment.  You also asked us to confirm than an arrangement need not be in writing in order to be bona fide and that an arrangement which is evidenced by way of letter between employer and employee or a corporate policy applicable to all such loans would be considered to be a bona fide arrangement.

Whether bona fide arrangements were made at the time a loan was granted for the repayment thereof in a reasonable period of time is a question of fact that must be determined in light of the circumstances of each case. 

While paragraph 12 of IT-119R3 states that normal commercial lending practices will be considered a factor in determining whether the repayment schedule is  reasonable for a particular situation, you point out that it is not always possible to look to normal commercial practice where the loan is non-interest bearing or bears a rate of interest which is below fair market value.  We agree.

We also recognize that other factors, such as the credit worthiness of the borrower and the borrower-lender relationship will affect the arrangements made. in general, however, a housing loan amortized over twenty five years, renewable every five years at the prescribed rate of interest would likely be accepted as a reasonable period of time for repayment while a non-interest bearing housing loan with a fifteen year term would not appear reasonable.

With respect to your question concerning bona fide arrangements, it is our view that while no specific written documentation, such as a mortgage, is required to establish the arrangement as bona fide, it is usually in the interest of parties making bona fide arrangements to have some written documentation as to the repayment schedule. Furthermore, it is inconsistent with normal commercial practice for a lender to loan a large sum of money without security.  We would also point out that in order to remain exempt from the application of subsection 15(2) of the Act during the term of the loan, the borrower must adhere to the original arrangements and not be in default on the loan.

We trust our comments are of assistance to you.

Yours truly,

R.D. Weil for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch