21 September 1990 Income Tax Severed Letter ACC9628 - Loan to Shareholder to Assit in 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.

24(1)                                               901277
                                                    A. Humenuk
                                                    (613) 957-2135

19(1)

SEPT 21 1990

Dear Sirs:

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

This is in reply to your letter of June Il, 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-l20R3
          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,

for Director Business and General Division Rulings Directorate Legislative and intergovernmental Affairs Branch