Chapter 32: Shareholder Benefits and Loans Flashcards
What is a specified employee?
Employee/shareholder who owns more than 10% of the shares or is not at arm’s length with the company
What are the special rules against Shareholder Loans?
Loans must be included in income unless any of the following conditions are met:
i) shareholder is an employee of corporation and meets the exemption for employees
ii) loan is repaid within one taxation year after the year it was made (cannot be on two consecutive fiscal balance sheets)
iii) loan was made in the ordinary course of money-lending busines
iv) loan is intercompany loan or made to non-resident
When is an employee/shareholder exempt?
If a loan is made to a specified employee for one of the three reasons:
1) used to acquire a dwelling for their own occupation
2) to acquire newly issued treasury shares
3) to acquire a motor vehicle for employment use
What are some other considerations to note when looking at employee/shareholder problems?
If loan is not included in income, imputed interests must be included in their income
If Loan is included income, no imputed income is included
Repayment of loan that has been included in income is deductible in the year it is repaid.
How can you clear out shareholder loan accounts, and what is it?
Owner-managers comonly draw from company resources throughout the year. you cna pay off these “loans” by using dividends, salaries or bonuses. but the CRA will not considered these as a series of repaymnets of loans - must be all or nothing approach
What needs to happen if you were to use dividends or salaries to pay off the shareholder loan?
It needs to be been paid out prior to the end of the corporations taxation year
What happens if the loan qualifies under the one year rule?
IT does not need to be included in income, however, imputed interest benefits are applied to the period in which it was outstanding.
Imputed interest benefit is classified as property income to the shareholder
What are the other exceptions?
1) Indebtedness between non-residents: if the debtor is a non-resident, the loan is deemed a dividend and the corporation is required to withold
2) loan from a coropration is in the course of business of that corporation
3) loan is made to a shareholder who is also an employee, but not a specified employee and the loan is made for the purpose of:
- howing a home
- allow them to acquire unissued shares
- motor vehicle used for the performance of their duties.
To avoid these excemptions to be excluded from income, the following needs to occur:
- there are arragenemtns made for repayment within a reasonable period of time.
- loan arises because of employee employment and not because of their shareholderings
