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.
Principal Issues:
whether amounts which cannot be reconciled to the purchase of a home and amounts paid for renovations to a home are qualified purposes for excluding the amount of a shareholder's loan from income under 15(2). Also whether the terms of repayment which are admittedly reasonable were made in good faith
Position:
the reconciliation of amounts advanced to the purchase is an audit issue but based on the info provided, it would appear that the non-reconciled amounts and the amount paid for renovations does not qualify for the exemption. since a journal entry transferring the debt from one shareholder account to another is not a repayment, the shareholder has not in fact complied with the required terms of repayment and thus, a reasonable argument could be made that the full amount of the loan should be included in income
Reasons:
May 8, 1996
XXXXXXXXXX Tax Services office Headquarters
XXXXXXXXXX A. Humenuk
Chief of Audit 957-8953
Attention: XXXXXXXXXX
960860
Housing Loan
We are replying to your memorandum of February 29, 1996, concerning the application of subsection 15(2) to a series of advances made by a corporation to its major employee-shareholder under the terms of an agreement dated May 1, 1992.
Under the terms of the agreement, the corporation agreed to lend the shareholder an amount not exceeding $120,000 for the purpose of acquiring a house. The funds were to be advanced in instalments over the period of time covered by the agreement, May 1, 1992 to July 1, 1993. The agreement further states that the loan is to be repaid in monthly amounts of $692.10 commencing June 1, 1993 with the rate of interest to be renegotiated every 5 years.
The taxpayer acquired a home in June of 1992 and then subsequently sold it in December of the same year, applying the proceeds at that time to the purchase of a second home in December of 1992. The amounts advanced to the taxpayer under the terms of the agreement with his corporation included
-$32,574.28 which was applied to the purchase of the first home,
-$9,000 for renovations to the first home and
-$64,017.29 which was allegedly applied to the purchase of the second home during the period October 20, 1992 to May 18, 1993.
Of the $64,017.29 which the taxpayer claims was applied to the purchase of the second house, you were only able to reconcile $50,247 of the funds advanced by the corporation to the statement of adjustments for that second home. You have asked what portion of the advances can be excluded from income by reason of the exceptions in paragraph 15(2)(a)(ii) of the Act.
Subsection 15(2) of the Act requires a shareholder to include in income the entire amount of any loan received from the corporation unless that loan meets one of the exceptions noted therein. The absence of language such as "to the extent that" or "that portion of" suggest that it is not appropriate to apportion a part of the loan to be included in income. As stated in paragraph 13 of IT-119R3, the whole amount of the loan or indebtedness must meet the criteria described in that paragraph in order for it to be excluded from income.
While paragraph 23 of IT-119R3 states that a repayment need not necessarily be in cash, it is our view that a journal entry which transfers an amount of debt outstanding from a housing loan account to an another shareholder drawings account does not constitute a repayment. On the basis that the taxpayer has not in fact repaid the loan in accordance with the terms of the agreement, a reasonable argument can be made that the terms of repayment set out in that agreement were not "bona fide" and thus, the full amount of the funds advanced in each of 1992 and 1993 should be included in the shareholder's income. If the amount of the indebtedness incurred in 1992 and 1993 is included in the shareholder's income for those years, no amount is included in income under section 80.4 for the years during which the funds are outstanding by reason of paragraph 80.4(3)(b) of the Act.
It should be noted that while the above-noted comments are sufficient to require the full amount of the loan to be included in income, the loan also fails to be excluded from income by reason of paragraph 15(2)(a)(ii) of the Act as it presently reads, because the full amount of indebtedness was not used to acquire a dwelling for the shareholder's habitation.
As stated in paragraph 18 of Interpretation Bulletin IT-119R3 "Debts of Shareholders, Certain Persons Connected with Shareholders, etc.", a loan or indebtedness incurred in renovating or repairing a home does not qualify under the exception for housing loans. Furthermore, $13,590.20 of the total amount which was alledgedly applied to the purchase of the second house cannot be reconciled to the statement of adjustments for the purchase of that house.
Please note that the Department of Finance has proposed changes to subsection 15(2) of the Act which are to be effective for loans or indebtedness arising in 1990 and subsequent taxation years. Provided that the proposed changes are passed in substantially the same form as presently proposed, the effect of the proposal on the tax consequences applicable to the housing loan described in your memorandum will be limited to a renumbering of the statutory provision which would otherwise exempt such a loan from inclusion in income under subsection 15(2) of the Act. It is the criteria set out in proposed subsection 15(2.4) which is relevant for the purpose of determining whether subsection 15(2) of the Act requires an amount to be included in the shareholder's income on account of a housing loan obtained in 1992 or 1993.
John F. Oulton
Section Chief
Business, Property & Personal Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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