25 March 1992 Income Tax Severed Letter 9205155 - Housing loan to sole shareholder-employee with no interest or repayment terms

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: HOUSING LOAN TO SOLE SH-EMPLOYEE, NO INTEREST, NO REPAY Section(s): 15(2), 80.4(1), 80.4(2), 80.4(3), 80.4(6)]

March 25, 1992

TORONTO DISTRICT OFFICE HEAD OFFICE
Audit Review Section Personal and General
Business Enquiries Group Section
A. Humenuk
(613) 957-2134

Attention: P. Keirstead

920515

Housing Loan

We are replying to your memorandum of February 13, 1992, concerning the prescribed rate to be used on a particular housing loan. Reference is also made to our telephone conversation (Saab\Humenuk) of March 11, 1992.

Facts

XXX

It is the taxpayer's position that the loans were received by virtue of her employment and that the prescribed rate to be applied to the first loan for the purpose of section 80.4 of the Act continues to be XXX, the rate in effect when the loan was originally granted. It is your position that the first loan became a new housing loan upon the disposition of the old house and acquisition of the new house and that consequently, the prescribed rate to be applied to the amount outstanding after November 1989 is XXX. You have asked for our comments as to whether the change in residences causes a disposition of the old loan and acquisition of a new loan in respect of the XXX demand note.

We have reviewed the documentation submitted and feel that the first issue to be addressed is whether the loan was received by virtue of the employee-shareholder's employment or shareholdings.

In the 1988 Revenue Canada Round Table, we set out the following position:

• " Where a public corporation makes a bona fide loan to a shareholder qua employee rather than qua shareholder, on the same conditions as to other employees who are not shareholders, it is Revenue Canada's policy to treat it as a loan to an employee rather than to a shareholder (Ref. TR-98 dated March 6, 1980). The situation may be different for a shareholder of a private corporation than for a public corporation."

XXX

On the presumption that the loan was granted to her by virtue of her shareholdings rather than her employment, we must next consider the implications of subsection 15(2) of the Act. Since the demand note does not have any agreed terms of repayment, the loan does not fall within the exception described in paragraph 15(2)(a) of the Act and should be included in her income for 1988 since it was not repaid within one year from the end of the corporation's taxation year. If the amount of the loan is included in her income for 1988, no amount will be included in income under section 80.4 of the Act, by virtue of subsection 80.4(3).

If, for some reason, the loan is not included in her income for 1988 despite being received by virtue of her shareholdings, the prescribed rate to be applied for any particular period is the prescribed rate in effect for that period of time. The ceiling on the prescribed rate described in subsection 80.4(4) of the Act only applies if the loan is received by virtue of an individual's office or employment.

If however, it is determined that the loan was received by virtue of her employment, the question remains as to whether the change in residences causes a disposition of the old loan and acquisition of a new loan.

Other than subsection 80.4(6) of the Act which deems a new home purchase loan or home relocation loan to be received every five years where the repayment term of such loan exceeds 5 years, there is no specific provision in the Act which would aid in the determination of whether or not a new loan has been created for the purpose of section 80.4 of the Act. As stated in paragraphs 6 to 8 of IT 448 -Dispositions - Changes in Terms of Securities", we do not usually consider a change in the terms of a debt obligation to be a disposition unless the change is fundamental to the economic interest of the parties involved and the change is not a change authorized by the original terms of the agreement. A change in the security underlying the debt is not ordinarily considered a fundamental change to the economic interests of the parties involved.

Since there is no apparent change to the original loan agreement in the case at hand ( XXX ), it is our view that the disposition and acquisition of a residence by the shareholder did not cause a corresponding disposition and acquisition of the loan.

However as stated above, we feel that a strong argument can be made that the loan was not received by virtue of her employment and that subsection 15(2) would apply to require the XXX to be included in her income for 1988.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

• c. c. R. Roy, Taxation Programs Branch