Borrowing money from a corporation is fraught with complex tax implications and can lead to significant income tax problems. In fact, several provisions of the Income Tax Act (the “Act”) are designed to prevent the withdrawal of tax-free funds from a corporation, specifically by way of a loan. That is why it is important to consult an experienced professional such as a tax lawyer before proceeding with such transactions.
For example, if you are an employee of a corporation and you borrow money from the same corporation, the loan may be deemed a taxable benefit that must be included in your income. This potential tax problem arises pursuant to subsection 15(2) of the Act and is also applicable if you are the employee of your own corporation. However, you may be eligible for preferential tax treatment of the loan resulting in tax relief (i.e. it is not subject to subsection 15(2) and the amount is not included in income) under the following circumstances:
- If the corporation is in the business of lending money
- If the loan is used to purchase a vehicle for business purposes
- If the loan is used by an employee to purchase previously unissued shares from the corporation or a related corporation
- If the loan is repaid within one year after the corporation’s year-end in which the loan was made
- if the loan is made to a shareholder-employee as an employee or employee’s spouse or common-law partner (not as a shareholder) and is used to purchase a dwelling.
According to the Canada Revenue Agency (“CRA”), a dwelling includes the following: “a house, an apartment in a duplex or apartment building, a condominium, a cottage, a mobile home, a trailer, a houseboat as well as a share of the capital stock of a cooperative housing corporation acquired for the sole purpose of acquiring the right to inhabit a dwelling owned by the corporation”.
The tax relief provided for the purchase of a dwelling can be found under subsection 15(2.4) of the Act. Paragraph 15(2.4)(a) and (e) effectively reverses the judgement in Silden v. Canada,  2 C.T.C. 123 (FA), whereby the court held that a loan made to an employee who was also a shareholder of the corporation must be included in the individual’s income even if the loan was made to the employee qua employee. Subsection 15(2.4) now allows a housing loan not to be included in income if it was made to the individual as an employee (or as the employee’s spouse or common-law partner) rather than as a shareholder. According to CRA, a benefit is considered to be conferred qua employee if it is reasonable to conclude that the benefit is conferred on the individual as part of reasonable employee remuneration package. If the shareholder is the only employee of the corporation, CRA will generally consider the loan to be conferred qua employee if the individual can demonstrate that employees (who are not shareholders) of other corporations with similar responsibilities and job duties receive loans of similar amounts under similar conditions.
However, there are certain conditions that have to be met. For instance, bona-fide arrangements must be made for the repayment of the loan. Bona-fide is not defined in the Act but generally means the arrangement must be made in good faith, and would include an acceptable interest rate and repayment terms. This would normally require that a written loan agreement be entered into and the corporation pass resolutions approving the loan.
If you are considering borrowing money from a corporation, or would like to find out whether your current loan from a corporation is eligible for preferential treatment, contact our experienced Canadian tax lawyers for a consultation.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."