Tax Lesson 12 YOURLOGO Start Lecture Note: This screen has no script. Static page. YOURLOGO Start Lecture

Shareholder Benefits If a shareholder receives a benefit from a corporation the benefit is included in the shareholder’s income as property income. An example is when the corporation pays for personal expenses of the shareholder such as personal rent, vacation, provides a car or lends money at low or no interest. (These rules are essentially the same as the employee benefit rules; for example, the same standby charge formula is used for cars provided to shareholders) Note: also that these expenditures are typically not incurred to earn income and hence would not be deductible by the corporation

Shareholder Loans If a shareholder who is an individual receives a loan from a corporation (that is not a financial institution) then the entire principal of the loan must be included in the income of the shareholder (in the year that the loan is received) unless one of 2 exceptions are met. (These shareholder loan rules do not apply to financial institutions) Exception 1: the loan is repaid within 1 year of the year-end of the corporation (i.e., the lender). If this occurs the principal will not have to be included in the shareholder’s income Exception 2: If a shareholder (who is also an employee) receives a loan from a corporation and the loan is received by virtue of being an employee then the principal will not have to be included in the employee’s income if: the shareholder is not a specified shareholder (i.e., they own, together with any related persons, less than 10% of any class of shares); and there are bona fide arrangements for repayment within a reasonable time frame; or the shareholder is a specified shareholder and the loan is used to buy: a dwelling; an automobile (to be used for work purposes); or treasury shares (of the employer or a related corporation); and there are bona fide arrangements for repayment within a reasonable time frame If the principal is included in the shareholder’s income then the shareholder can claim a deduction from income when the loan is repaid; and there will not be a low interest taxable benefit (if it is a low or no interest loan)

Example Problem Shareholder Loans Randy is the sole shareholder and president of Y Not Inc. (YNI) a CCPC. YNI has a December 31st year-end. On November 1, 2016, Randy borrowed $100,000 from YNI in order to purchase treasury shares in a company that is related to YNI. The $100,000 loan was granted to Randy by virtue of his shareholdings. On December 1, 2016 Randy borrowed $40,000 in order to buy a car used to meet various employees, suppliers and creditors of YNI. Other senior employees have been given similar car loans for similar amounts in the past. The two loans made to Randy are interest free and the parties have signed written loan agreements. The loan agreement for the $100,000 loan states that the principal borrowed will be repaid in full within 2 years after the date of the loan. The loan agreement for the $40,000 car loan states that the principal borrowed will be repaid in full over a 3 year period with monthly payments due on the first day of each month. The first payment is due February 1, 2017. You can assume that the prescribed interest rate for all periods is 2%. Required: discuss the 2016 income tax consequences.