2019-0808411E5 Application of 15(2.4) to home purchase loan

Principal Issues: Whether paragraph 15(2.4)(b) applies to preclude the application of subsection 15(2) where a housing loan is made to an incoming employee whom is a minority shareholder.

Position: Depends on the particular facts.

Reasons: If the shareholder (or a spouse or common law partner) received the housing loan from the corporation in an employment capacity, and not in a shareholder capacity, and if the housing loan repayment is within a reasonable time then the exception provided in subsection 15(2.4) should apply to preclude the application of subsection 15(2). More information is required to make a determination.

Author: Thomas, Allison
Section: 15(2.4)

                                                                                                                                                     2019-080841
XXXXXXXXXX                                                                                                                              Allison Thomas

June 14, 2019

Dear XXXXXXXXXX:

Re:  Application of paragraph 15(2.4)(b) to home purchase loan

This is in response to your correspondence dated May 9, 2019, wherein you requested our views with respect to the application of subsections 15(2) and 15(2.4) of the Income Tax Act (the “Act”) in the following scenario.

A Canadian-controlled private corporation (“Eco”) is currently in the process of hiring an individual (“Mr. A”) who will become its CEO. Mr. A is currently a non-resident and will be required to move to Canada if he accepts the position. Mr. A will also become a shareholder of Eco and will hold 3% of Eco’s outstanding share capital. Due to the high cost of housing, Eco has agreed to provide Mr. A with a housing loan of up to $1,000,000. The housing loan will be repayable over 5 years and bear interest at the prescribed rate of interest. Eco does not have a previous history of providing housing loans to its shareholder-employees but it has previously provided loans to other shareholder-employees to assist in their purchase of shares of Eco.

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Our Comments

Subsection 15(2) provides, inter alia, that where a shareholder has received a loan from, or has become indebted to, a corporation, the amount of the loan or indebtedness is included in computing the income of the shareholder for the year in which the loan was received or the indebtedness arose. Subsection 15(2.4) provides specific exceptions to the application of subsection 15(2). Paragraphs 15(2.4)(b), (e) and (f) provide that subsection 15(2) will not apply to a loan made, or a debt that arose:

*     in respect of an individual who is an employee of the lender or creditor;

*     to enable or assist the individual to acquire a dwelling, provided that the dwelling is acquired for the individual’s habitation;

*     when it is reasonable to conclude that the loan or indebtedness was received because of the individual’s employment rather than because of any person’s shareholdings; and

*     bona fide arrangements were made for the repayment of the loan or indebtedness at the time it was incurred.

In considering the issue of whether or not “benefits” are conferred upon an individual by virtue of his or her capacity as a shareholder (qua shareholder), or as an employee (qua employee), of a corporation, it has generally been our view that “benefits” are received qua shareholder where that person can significantly influence the corporation’s business policy. However, this might not be the case where the individual is only a minority shareholder of the corporation and does not otherwise have significant influence over the corporation.

Generally, a benefit will be considered to be conferred qua employee if it is reasonable to conclude that the benefit is conferred on the employee-shareholder as part of a reasonable employee remuneration package. This might be the case where the parties were dealing with each other on an arm’s-length basis at the time such remuneration package was negotiated.

However, where the employee-shareholder is the only shareholder (or a majority shareholder), we will generally consider a loan to be received by virtue of employment where it can be shown that other employees (whom aren’t shareholders) with similar duties and responsibilities of another similar-sized employer, receive loans of similar amounts and under similar terms and conditions as that granted to the employee‑shareholder.

In addition, unless the facts clearly indicate otherwise, in circumstances where the option to borrow funds is only made available to shareholders, or when the terms and conditions attached to loans made to employee-shareholders are more favourable than those attached to loans made to other employees, the loan will be considered to have been made to the employee-shareholder qua shareholder.

Other factors, such as the particular local housing market conditions, may also be relevant in making such a determination.

Whether or not a loan or other indebtedness was received by an individual in his or her capacity as a shareholder or as an employee is a question of fact which can only be determined by reviewing all the relevant factors such as the terms and conditions relating thereto and the relationship of the parties at the time the loan was made or the indebtedness arose.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke, CPA, CA
Manager
Corporate Reorganizations Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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