Special rules apply to loans advanced from a corporation to a shareholder or any related person which require an income inclusion in the hands of the borrower..
In a July 8, 2019 Tax Court of Canada case, CRA had reassessed the taxpayer to add loans received from a corporation controlled by her brother and his wife to her income. Special rules apply to loans advanced from a corporation to a shareholder or a “connected person” (which includes any related person). These rules effectively require an income inclusion in the hands of the borrower if loans are not repaid by the end of the corporation’s year following the year in which the loan was advanced.
Loan from corporation – taxpayer loses
The Court held that the taxpayer had made a misrepresentation by failing to report the loans as income. Her knowledge that she had borrowed $45,000 from a corporation controlled by family members over the period from 2009 to 2012, and her failure to seek advice from anyone, including the corporation’s accountant, regarding the tax implications of such a loan was sufficient neglect or carelessness to permit reassessment of each year in which funds were advanced, even beyond the ordinary three-year reassessment period. As the loans had not been repaid in time, the full amounts were included in income.
ACTION ITEM: Advice should be sought if you currently have, or are considering, personal loans to a shareholder of a corporation, or a family member.
