1992 MANITOBA ROUND TABLE
QUESTION NO. 17
Housing Loans
In the March, 1991 Access Letter, Revenue Canada, Taxation, Business and General Division was reported as stating that a housing loan amortized over 25 years, renewable every five years at the prescribed rate of interest, would likely be acceptable as a reasonable period of time for repayment while a non-interest bearing housing loan with a 15 year term would not appear reasonable.
(a) What is Revenue Canada, Taxation's position as to a reasonable period of time for repayment with respect to a non-interest bearing housing loan?
(b) Would a 10 year principal repayment based upon 1/25th total principal outstanding and a balloon payment of the remaining balance of the loan at the end of the tenth year constitute a reasonable period of time for the repayment?
DEPARTMENT'S POSITION
(a) Whether bona fide arrangements are made for the repayment of a housing loan within a reasonable period of time at the time the loan is made is a question of fact which can only be determined upon consideration of all the circumstances of a particular situation.
The Department generally considers that a bona fide loan arrangement is one that is consistent with the normal commercial practice that would prevail for the type and amount of loan involved. It follows therefore, that the closer a repayment schedule resembles one that is available in normal commercial practice, the more likely it is that it will be considered a reasonable time frame for repayment. While we recognize that non-interest bearing loans are not available commercially, the terms of repayment for a non-interest bearing loan should be based on the same factors that might be considered in a commercial transaction (i.e. security of the loan, ability of the creditor to repay the loan, etc.).
(b) As stated above, it is a question of fact as to whether a particular repayment schedule is reasonable in the circumstances. However, provided that the terms and conditions of a loan are otherwise reasonable in the circumstances and the borrower can reasonably be expected to be able to make the payments as they become due without refinancing, a repayment schedule such as that you describe would likely be considered reasonable.
A. Humenuk - Section 24
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