Executors and personal representatives are tasked with making sure the deceased’s tax obligations are properly dealt with out of the deceased’s estate. An issue that may arise in the course of dealing with the obligations is how to deal with loans and advances from a private company. The Canada Revenue Agency (CRA) recently shared its view on the application of a tax rule to a home purchase loan from a private company.
A Canadian Controlled Private Company (CCPC) is currently in the process of hiring an individual (Mr. A) who will become its CEO. Mr. A is 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, CCPC has agreed to provide Mr. A with a housing loan of up to $1,000,000, repayable over 5 years bearing interest at the prescribed rate. CCPC does not have a previous history of providing housing loans to its shareholder-employees, but it has provided loans to other shareholder-employees to assist in their purchase of shares of CCPC.
In considering the issue of whether “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 is the CRA’s 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 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), the CRA 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 local housing market conditions, may also be relevant in making such a determination.
Whether 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.