| Please note that the information provided herein is not | | | | arose), then it would not need to be included in the |
| legal advice and is provided for informational and | | | | spouse's income (and hence no taxes would need to |
| educational purposes only (and is only current to the | | | | be paid). So, the spouse would not need to include the |
| date that it was written). If you need legal advice with | | | | amount of the loan in his or her income and pay taxes |
| respect to tax issues, you should seek professional | | | | on it so long as the loan was repaid within 1 year from |
| assistance. | | | | the end of the corporation's taxation year. To better |
| So you have a Canadian corporation and you want to | | | | understand this situation, take the following example. A |
| give your spouse and interest-free loan? What could | | | | corporation's year end is August 31. A shareholder's |
| go wrong, you say? Well, the tax implications may not | | | | spouse took out a loan on December 31st, 2008. The |
| make it worth your while. | | | | clock would not start ticking until August 31st, 2009 and |
| For starters, s. 15(2) of the Canada Income Tax Act | | | | the spouse would only need to repay it by August 31st, |
| provides that if a person is "connected" with a | | | | 2011 to avoid including it in his or her tax return. |
| shareholder of a corporation and receives a loan from | | | | The Canada Revenue Agency Interpretation Bulletin |
| that corporation, then the amount of that loan is to be | | | | (IT-119R4) on shareholder loans helps explain what is |
| included in that person's income for the year (and | | | | meant by the phrase "series of loans or other |
| hence tax must be paid on it). Here, the word | | | | transactions and repayments" (found at the end of s. |
| connected is defined in s 15(2.1) to include person with | | | | 15(2.6):28. It is a question of fact whether or not a |
| whom the shareholder does not deal at arm's length | | | | repayment of a loan is part of a series of loans or |
| with (which includes your spouse). | | | | other transactions and repayments. In most cases, |
| What about the interest free part of the loan, you | | | | when there are only a few loans or other transactions |
| say? Well, under s.80.4(2), the spouse may have to | | | | and a few repayments made during a taxation year |
| include the amount of interest that would have | | | | of a lender, there is no such series. However, when |
| otherwise been paid in their income tax (and hence | | | | only one loan or other transaction and one repayment |
| pay tax on it): once again, if a person is "connected" | | | | occur in each taxation year of a lender, a series of |
| with a shareholder of a corporation (i.e. which includes | | | | loans or other transactions and repayments may still |
| a spouse) and receives a loan from that corporation, | | | | be in evidence. This could occur, for example, when a |
| then that person will be deemed to have received a | | | | repayment is of a temporary nature, such as a loan |
| taxable benefit (i.e. must pay tax on) equal to the | | | | that is repaid shortly before the end of the year and |
| difference of the interest they paid in the year and the | | | | the same amount, or substantially the same amount is |
| interest they should have paid in the year (i.e. a | | | | borrowed shortly after the end of the year. Such a |
| prescribed rate). | | | | repayment of a temporary nature is not considered to |
| Overall, therefore, a shareholder of a corporation who | | | | decrease the loan balance in applying subsection 15(2) |
| offers his or her spouse an interest free loan could be | | | | and paragraph 20(1)(j) to a series of loans or other |
| doing more harm than good: the principal and the | | | | transactions and repayments. |
| interest might end up being included in the spouse's | | | | So if a shareholder's spouse were to take out a |
| income for tax purposes. | | | | corporate loan and repay that amount before the year |
| Please keep in mind, however, that there are other | | | | end (e.g. August 31st), and then shortly thereafter take |
| provisions in the Canada Income Tax Act which | | | | out "substantially the same amount" as was repaid |
| modify or make these sections inapplicable; it really | | | | before the corporation's year end, then the Canada |
| depends on the particular situation. One such example | | | | Revenue Agency may deem such transactions to be |
| deals with repayment of the corporate loan within one | | | | "a series of loans or other transactions and |
| year. Section 15(2.6) of the Canada Income Tax Act | | | | repayments" - for which the spouse will need to |
| provides that, if the corporate loan to the spouse is | | | | include the amount as income under s. 15(2). |
| repaid by the spouse within 1 year after the end of the | | | | Remember, if you need tax and/or business advice, |
| taxation year (of the lender/creditor in which the loan | | | | you should seek professional assistance. |