Dear Sirs:
Re: Shareholder Debt
This is in reply to your letter of April 4, 1991 in which you requested our views as to whether a loan made by a corporation to its shareholder under the circumstances described below would confer a benefit on the shareholder under subsection 15(2) of the Income Tax Act.
The facts which you have asked us to consider are as follows:
24(1)
You have asked whether under these circumstances the loan advanced to the shareholder would be considered to have been made "to enable or assist the employee or his spouse to acquire a dwelling for his habitation" for the purposes of subparagraph 15(2)(a)(ii) of the Act. You have also asked whether the terms of the loan as described above would constitute a bona fide arrangement within a reasonable time.
In order for the loan to the shareholder/employee to fall within the ambit of subparagraph 15(2)(a)(ii) of the Act the proceeds of the loan must be used by the employee (or his spouse) to acquire a dwelling for his habitation. The Department has taken the position that where an existing dwelling is demolished and a new one constructed in its place, such a transaction constitutes an acquisition of a dwelling.
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. The Department, generally, considers that a bona fide loan arrangement is one that is consistent with normal commercial practice that would prevail for the type of loan involved. For example, a housing loan amortized over 25 years, renewable every five years, at a prescribed rate of interest would be considered acceptable while a non-interest bearing housing loan with a 15 year repayment term would be considered much less so. We are, therefore, unable to provide you with a definitive reply as to whether the type of arrangement described would be considered bona fide without taking into account the circumstances of a particular employee. It follows, also, that any change to the repayment arrangement that would bring it closer to one that is available in normal commercial practice would increase the likelihood that it would be considered bona fide.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch