12 September 1997 External T.I. 9712345 - WHETHER REPAYMENT OF MORTGAGE TO ENABLE OR ASSIST

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:

Housing loan: whether draft subsection 15(2.4) exception is met.

1)Whether repayment of existing mortgage is to "enable or assist."

2)Whether non-shareholder senior employees refusal to partake in housing loan program taints individual's reception of loan as an employee.

3)Whether 15 year repayment term is within a reasonable time.

Position:

General discussion.

1) No, except in particular circumstances

2)Not necessarily; if same terms and conditions are offered

3) Unable to determine, perhaps.

Reasons:

1)Position in IT-119R3 par. 17

2) See file E9524620

3) See file E9400835, must be normal commercial practice

971234
XXXXXXXXXX Roxane Brazeau-LeBlond, CA

Attention: XXXXXXXXXX

September 12, 1997

Dear Sir:

Re: Housing loan

This is in response to your letter of May 1, 1997, in which you asked us to comment on the tax consequences of a loan made by a corporation to an individual who is both a shareholder and an employee of the corporation in the following hypothetical situation.

The corporation is willing to offer loans to its other senior managers under the same terms and conditions as will be offered to the individual. The purpose of the loan is to assist the individual to acquire a dwelling to be occupied by the individual or to repay a portion of the mortgage coming due on a dwelling occupied by the individual. The individual's mortgage is amortized over a 15 year period.

Question

You would like confirmation that the loan will not be subject to the income inclusion under subsection 15(2) of the Income Tax Act (the "Act"). You were particularly concerned as to whether the abstention of the other senior managers of the corporation to participate in the corporation's housing loan program prevents the individual's from being considered to have received the loan by virtue of his employment rather than his shareholdings. You also inquired as to whether a 15 year repayment term can be considered to be "repayment within a reasonable time" for the purpose of proposed paragraph 15(2.4)(f) of the Act.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature and are not binding on the Department.

An individual who is a shareholder of a corporation and who has, in a taxation year after 1981, received a loan from, or become indebted to, the corporation will be required to include the amount of the loan or indebtedness in income for the year unless the loan or indebtedness comes within the exceptions for certain types of loans described in paragraph 15(2)(a) or proposed subsections 15(2.3) to 15(2.5) of the Act or the exception based on repayment as described in paragraph 15(2)(b) or proposed subsection 15(2.6) of the Act.

For the income inclusion in subsection 15(2) of the Act not to apply by reason of subparagraph 15(2)(a)(ii) or proposed paragraphs 15(2.4)(b), (d) and (e) of the Act, the loan must be received by an individual who is an employee (or an employee's spouse) to enable or assist the individual to acquire a dwelling or a share in the capital stock of a cooperative housing corporation (acquired for the sole purpose of acquiring a right to inhabit a dwelling owned by the corporation) where the dwelling is for the individual's habitation. In addition, the borrower or debtor must be able to establish that bona fide arrangements were made, at the time the loan was made or the indebtedness arose, for repayment of the loan within a reasonable time.

It is a question of fact to be determined in a particular case as to whether or not loans made by a corporation to individuals could be considered to be received by the individuals in their capacity as employees or as shareholders. The Department takes the position that where a public corporation makes loans to shareholders in their capacity as employees rather than as shareholders, on the same terms and conditions as to other employees who are not shareholders, the loan would be considered to be a loan received by virtue of one's office or employment rather than one's shareholdings. However, the situation could be different where the individuals are shareholders in a private corporation.

Where an individual who is the sole shareholder, director, officer and employee of a corporation wishes to obtain a loan from the corporation because of the individual's employment that fits within subparagraph 15(2)(a)(ii) or draft paragraphs 15(2.4)(b), (c), and (d) of the Act, the Department will generally consider a loan to be received by virtue of employment where the individual can show that employees with similar duties and responsibilities to another employer of a similar size, but who are not shareholders of that other employer-corporation, receive loans of similar amounts under similar conditions as that granted to the individual.

In relating these comments to the above situation, the question of whether the loan is granted to the individual in his capacity as an employee remains a question to be determined based on a review of all relevant facts. For example, the fact that other senior managers of the corporation who are not shareholders of the corporation receive loans under the same terms and conditions as the individual would normally indicate that the loan is received by the individual in the individual's capacity as an employee rather than as a shareholder. However, if none of the non-shareholder senior managers of the corporation choose to receive loans under the corporation's housing loan program, it may indicate that the corporation's housing loan program is not, in fact, available to employees and that the loan is received by the individual in the his capacity as a shareholder.

Whether a loan has been made or indebtedness has arisen to "enable or assist" the borrower or debtor, or the spouse of the borrower or debtor, to acquire a dwelling is a question of fact. However, the Department considers that a loan made or indebtedness arising for the purpose of refinancing a dwelling is not to enable or assist the borrower or debtor or the spouse of the borrower or debtor to acquire a dwelling unless, at the time of the acquisition, commitments were made between the two parties to the effect that the lender or creditor would provide the financing. In determining whether such commitments were made, all relevant facts and evidence will be considered, including formal documentation of the commitment, the nature of the original financing which should have the characteristics of usual interim financing, (e.g. demand bank loan, the time lag between the date of the original financing and the date of the loan) and the reasons why the original financing was not by the lender or creditor.

Whether bona fide arrangements were made at the time the housing loan was made, for repayment of that loan within a reasonable period of time, is a question of fact that can only be determined upon consideration of all the circumstances of a particular taxpayer's case. We are, therefore, unable to provide you with a definitive response as to whether the type of arrangement you described above would be considered bona fide without taking into account the circumstances of the individual. However, in a given situation, one of the factors that the Department will consider is, as indicated in paragraph 12 of Interpretation Bulletin IT-119R3 "Debts of Shareholders, Certain Persons Connected with Shareholders etc." is the normal commercial practice that would prevail in a given situation.

However, it is our general view that a housing loan amortized over 25 years, renewable every five years, at a prescribed rate of interest would be considered to be consistent with normal commercial practice while a non-interest bearing loan with a 15 year repayment term would be considered much less so. In addition, consistent with normal commercial practice, bona fide arrangements in respect of a loan described in subparagraph 15(2)(a)(ii) or draft paragraph 15(2.4)(b) of the Act would include mortgage security on the property acquired by the shareholder.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch