2 July 1998 External T.I. 9811025 - LOW INTEREST LOAN TO BUY HOUSE FROM SPOUSE

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: loan made to employee shareholder to acquire ownership of matrimonial home owned soley by employee's spouse

Position: question of fact whether employee had beneficial or legal interest in ownership of matrimonial home

Reasons: If employee had previous interest in the property the loan could not be said to have been made to enable the employee to acquire an interest

July 2, 1998

XXXXXXXXXX 			981102
N. Graham

Dear XXXXXXXXXX:

Re: Loan to Employee to Acquire a Dwelling from Spouse

We are writing in reply to your April 22, 1998 letter, wherein you requested our views concerning a loan to an employee to acquire a dwelling from a spouse. Your proposed fact scenario involves an employee in receipt of a loan from the employer to acquire full ownership of a dwelling owned solely by the spouse. You ask whether such a loan would be included in the employee’s income under subsection 15(2) of the Income Tax Act (the ‘Act’).

Our Comments

The situation set out in your letter appears to relate to a specific taxpayer. Confirmation of the tax consequences of a proposed transaction will only be provided in response to a request for an advance income tax ruling. The procedures for requesting an advance income tax ruling are set out in Information Circular 70-6R3 dated December 30, 1996. On the other hand, if a transaction has already occurred, you may wish to submit the relevant facts and documentation to your local tax services office for their views. We are, however, providing you with the following general comments.

In general terms, subsection 15(2) applies to include an amount in income when a loan is made to a person who is both a shareholder and an employee. Although your correspondence does not discuss share ownership, we have assumed the employee to also be a shareholder.

The provisions of subsection 15(2) of the Act require an individual to include in income the amount of any loan or indebtedness to the corporation unless the loan or indebtedness meets the criteria for the exceptions found in subsections 15(2) to 15(2.7).

Specifically, a loan is excluded from income under subsection 15(2.4) where:

1. bona fide arrangements are made at the time of the loan for repayment of the loan balance within a reasonable time;

2. it is reasonable to conclude the employee received the loan because of the employee’s employment and not because of any person’s shareholdings; and

3. the loan was made to enable or assist the individual to acquire a dwelling for the individual’s habitation.

Assuming the employee meets the first two requirements, the question becomes whether the lending of money by the employer to the employee to acquire the entire interest in a dwelling owned solely by the employee’s spouse would meet the test under 3 above.

If the employee has an interest in the property before the loan is made, the loan would not qualify for the exemption and would be included in the income of the employee. Whether the employee has an interest in a property is a question of fact. For example, if an employee contributed to the original purchase of the dwelling, the registration of the dwelling in the name of the spouse would not preclude the employee from having such an interest. We refer you to Interpretation Bulletin, IT-437R Ownership of Property (Principal Residence), for the Department’s views on this issue. In our view, either a legal or beneficial interest in a property would disqualify the loan from the exclusion.

If the employee has no existing interest in the property at the time the loan is made, the exemption under subsection 15(2.4) may be available. Whether the exemption applies can only be ascertained by referring to all relevant facts and circumstances.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch