Want to give your spouse an interest-free loan from the corporation? Part 2
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to tax issues, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto business and tax lawyers registered on the website who can answer your questions.
As a follow up to my recent blog post about a corporate interest-free loan being made to a shareholder’s spouse, I thought it would be worthwhile to discuss one of the main exemptions to the tax treatment of that loan. Recall that, in my previous blog, the Canada Income Tax Act could apply to require the spouse to have to include in his or her income and pay taxes on the principal amount of the loan.
Recall that I also mentioned in that blog that there were exemptions to this rule. One such example, which I will discuss in this blog, deals with repayment of the corporate loan within one year. Section 15(2.6) of the Canada Income Tax Act provides as follows:
15 (2.6) Subsection 15(2) does not apply to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments [emphasis added].
So section 15(2.6) provides that, if the corporate loan to the spouse is repaid by the spouse within 1 year after the end of the taxation year (of the lender/creditor in which the loan arose), then it would not need to be included in the spouse’s income (and hence no taxes would need to be paid). So, the spouse would not need to include the amount of the loan in his or her income and pay taxes on it so long as the loan was repaid within 1 year from the end of the corporation’s taxation year. To better understand this situation, take the following example. A corporation’s year end is August 31. A shareholder’s spouse took out a loan on December 31st, 2008. The clock would not start ticking until August 31st, 2009 and the spouse would only need to repay it by August 31st, 2011 to avoid including it in his or her tax return.
I bolded the last part of s. 15(2.6) for a reason. The Canada Revenue Agency Interpretation Bulletin (IT-119R4) on shareholder loans helps explain what is meant by the phrase “series of loans or other transactions and repayments”:
¶ 28. It is a question of fact whether or not a repayment of a loan is part of a series of loans or other transactions and repayments. In most cases, when there are only a few loans or other transactions and a few repayments made during a taxation year of a lender, there is no such series. However, when only one loan or other transaction and one repayment occur in each taxation year of a lender, a series of loans or other transactions and repayments may still be in evidence. This could occur, for example, when a repayment is of a temporary nature, such as a loan that is repaid shortly before the end of the year and the same amount, or substantially the same amount is borrowed shortly after the end of the year. Such a repayment of a temporary nature is not considered to decrease the loan balance in applying subsection 15(2) and paragraph 20(1)(j) to a series of loans or other transactions and repayments.
So if a shareholder’s spouse were to take out a corporate loan and repay that amount before the year end (e.g. August 31st), and then shortly thereafter take out “substantially the same amount” as was repaid before the corporation’s year end, then the Canada Revenue Agency may deem such transactions to be “a series of loans or other transactions and repayments” – for which the spouse will need to include the amount as income under s. 15(2).
Remember, if you need tax and/or business advice from a Toronto or Ottawa lawyer or attorney, go to Dynamic Lawyers and make a post.
