1 October 1990 External T.I. 901640 F - Loans for Acquisition of Dwelling

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.

SUBJECT:  Loans for Acquisition of Dwelling

This is in reply to your memorandum of July 18, 1990 concerning whether two loans can be included in income under subsection 15(2) or are excluded from the application thereof by virtue of subparagraph 15(2)(a)(ii).

The relevant facts and information is set out below:

24(1)

3.     24(1)

In relation to the above situation, you have requested our views on four issues.

A)     Subparagraph 15(2)(a)(ii) requires that  24(1) This would normally occur in private corporations as well as public corporations where a loan is made to a key official or director of the company. Where minutes are produced, however, indicating that the loan was made to a shareholder/employee qua employee and it was made on the same terms and conditions as to other employees who are not shareholders and who deal at arm's length with the corporation or with other shareholders, then there is a presumption that the loan was made qua employee and section 15 would not be applicable.

B)        Section 15 of the Act requires that bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment of the loans within a reasonable period of time. You ask if, in our opinion, the loans are bona fide. You also ask what constitutes a bona fide loan. Among other things, IT-119R3 states, "In a given situation, one of the factors the Department will consider is the normal commercial practice which would prevail in a similar situation". In relation to these comments, you have asked us for our interpretation of the phrase "normal commercial practice" as used in paragraph 12 of IT-119R3. You mention in this respect that  24(1) You also indicate that bank and trust companies require repayment of principal and interest within a month of issuing the loan and refer to the Francis Louis Wright case (86 DTC 1415) in support of your argument. On page 1421 of the Wright case comments are made that interest should be charged on a loan described in subparagraph 15(2)(a)(ii) in order for the arrangement to be bona fide.

       24(1)

     As it had been previously decided in the Wright case that bona fide arrangements for the payment of the loan had not been made at the time the loan was obtained, it would appear that the comments in the Wright case related to interest are merely obiter dictum. In addition, there is no statutory requirement that interest be charged on loans of this nature and the Department has never adopted the position that a loan described in subparagraph 15(2)(a)(ii) must be interest bearing.

          As regards the circumstance  24(1)

     Accordingly, it is our view that 15(2) cannot be applied on the basis that repayment arrangements are not bona fide.

C)        With respect to inhabiting a dwelling, it is our general view that if a loan is used by an individual to acquire a seasonal residence, the dwelling will be considered to be acquired for an individuals habitation if the individual "ordinarily inhabits" the residence within the meaning of that term as set out in paragraph 9 of IT-120R3.

D)        In the case of the last issue, we note that subparagraph 15(2)(a)(ii) restricts neither the number of home loans that a shareholder may obtain nor the number of dwellings that he may own. However, if loans were made to a shareholder\employee for the purposes of acquiring dwellings in places such as Hawaii, Florida and the Swiss Alps, the circumstances should be carefully reviewed for the purposes of determining whether the loans were made to the individual in his capacity as a shareholder rather than as an employee.

ChiefServices, Public Utilities and Exempt Corporations SectionBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch