920461
24(1) M. Eisner
957-2138
Attention: 19(1)
April 14, 1992
Dear Sirs:
Re: Loan to purchase residence
This is in reply to your letter of February 11, 1992 in which you asked us about the tax consequences of a loan made by a corporation to an individual who is an employee and a shareholder of the corporation.
The issues you have raised involve a loan made in instalments for the construction of a house by the employee/shareholder and relate to section 80.4 of the Income Tax Act (the Act) and subparagraph 15(2)(a)(ii) of the Act.
The scenario outlined in your letter appears to relate to a specific taxpayer and involves proposed transactions. Confirmation of the tax consequences of such transactions 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 70-6R2. We are, however providing you with the following general comments.
Our Comments
It is the Department's position that where a loan has been made to an individual in his\her capacity as a shareholder, the loan cannot also be regarded as having been made to the shareholder in his/her capacity as an employee. For comments in this regard, you may refer to paragraph 9 of Interpretation Bulletin IT-421R entitled "Benefits to Individuals, Corporations and Shareholders from Loans or Debt". With respect to this position, subsection 80.4(4) of the Act provides rules that are beneficial in respect of a "home purchase loan" as defined in paragraph 80.4(7)(a) of the Act (see paragraphs 14 and 15 of IT-421R). However, since the definition of "home purchase loan" only refers to a loan described in 80.4(1) of the Act and this subsection is not applicable to a loan made to an individual in his/her capacity as a shareholder, a loan made in this respect would be subject to the provisions of subsection 80.4(2) of the Act assuming the amount of the loan was not included in the shareholder's income under subsection 15(2) of the Act.
Whether or not a loan made by a corporation to an individual could be considered to be received by the individual in his/her capacity as an employee or as a shareholder involves a finding of fact in each particular case. The Department has taken the position that where a public corporation makes a loan to a shareholder in his/her capacity as an employee rather than as a shareholder, on the same terms and conditions as to other employees who are not shareholders, the loan would be considered to be a loan to an employee rather than a shareholder. However, the situation could be different where the individuals are shareholders in a private corporation. As a further comment, we note that where a particular benefit is available only to shareholders, there is a presumption that the benefit is made to the individual in his/her capacity as a shareholder.
Where a loan has been made by a corporation to an individual in his\her capacity as a shareholder and the loan is used as described in subparagraph 15(2)(a)(ii) of the Act, an amount is not included in the shareholder's income under 15(2) of the Act if bona fide arrangements were made at the time the loan was made for repayment of that loan within a reasonable period of time. Whether such arrangements were made at the relevant 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 arrangement is one that is consistent with normal commercial practice that would prevail for the type of loan involved at the time the loan is made. For example, a housing loan amortized over 25 years, renewable every 5 years, at the 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 a particular type of arrangement would be considered to be bona fide without taking into account the circumstances of a particular shareholder/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.
For your further information, we are mentioning that this Department has previously indicated that a housing loan based upon a 1/25th annual reduction of the total principal outstanding at the time the loan was made and a balloon payment of the remaining balance of the loan at the end of the tenth year would likely constitute a reasonable period of time for repayment.
It is also our general view that, consistent with normal commercial practice, bona fide arrangements in respect of a loan described in subparagraph 15(2)(a)(ii) of the Act would include mortgage security on the property acquired by the shareholder.
In the case where a "home purchase loan" as defined in paragraph 80.4(7)(a) of the Act is made to an individual (an employee related loan) in instalments, subsection 80.4(4) of the Act refers to the "prescribed rate in effect at the time the loan was received". As a consequence of this wording, it is our view that this subsection would apply to each instalment. Similarly, subsection 80.4(6) of the Act would apply to each instalment.
These comments represent our opinions of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1991, these opinions do not constitute an advance income tax ruling and are not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
P.D. Fuocofor DirectorBusiness and General DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch