Home Purchase Loans (“HPL”) are loans given to an individual from a corporation. These loans are heavily scrutinized by CRA and there are many considerations involved.
During 2019, Canada Revenue Agency(“CRA”) released a Technical Interpretation that analyzed a prospective employee of a Canadian Controlled Private Corporation (“CCPC”). The interpretation determined that in particular situations, the HPL is a valid loan; in other cases, it is not. When the loan is considered to be invalid, the cash disbursement received by the individual will be treated as income in the year the funds became available.
Receiving the loan in your capacity as an employee
If you have received an HPL in your capacity as an employee, it may be exempted from income in the year you received the funds. To determine the exemption status, you must consider:
- You are an employee of the lender or creditor
- The loan was created to facilitate the purchase of a dwelling, provided the dwelling is for living purposes.
- It is plausible to conclude, you received the loan due to your employment and not ownership.
- The loan has clear payment terms and interest provisions.
All of these conditions must exist for the HPL to be exempted from income. If not you may have a significant income inclusion for the period. CRA has reviewed many HPLs and determined that the amounts received were not exempted from income. Following the reassessment, CRA will charge interest on the unpaid amount of taxes resulting from the reassessment. Additionally, CRA may assess penalties.
Receiving the loan in your capacity as a shareholder loan
CRA reaffirmed that HPLs received in your capacity as a shareholder would be included in the computation of the shareholder’s personal income.
CRA focuses on the control of the corporation when considering shareholders and the exemption status of the HPL. If a shareholder does not have significant control of the corporation and HPLs have been offered to employees of the corporation, these loans may be considered valid and exempted from income. Additionally, the loans offered to shareholders must be offered at the same conditions as the employee.
Corporations a sole shareholder
Where a corporation has a sole shareholder, the shareholder may find it incredibly difficult to prove they received the loan in their capacity as an employee. In such a case, CRA has determined the loan to be exempt if:
- Other non-shareholder employees have received an HPL
- Other non-shareholder employees have a similar role within the Corporation
- The HPL received by other non-shareholder employees was due in relation to their role within the corporation.
- A similar-sized Corporation would issue an HPL with similar terms, to these individuals i
When considering issuing an HPL, it is important to perform adequate planning and care. As such, it is highly recommended you speak to a tax professional.