Tax Question:
I have been told that a corporation can lend money to a shareholder to buy a car. Is this true?
Facts:
For a corporation to lend shareholder money for a vehicle and not have to worry about section 15(2), a number of conditions must be met:
The first and third points are generally easy to satisfy. To be an employee you need to be paid as an employee of the company. That means taking a salary. It is also easy to set up a repayment plan that is consistent with any loan you would get on the open market. It is the second point that is going to be difficult to satisfy. Basically, you have to demonstrate that you as an employee received this loan, not you as a shareholder. If you do not make similar loans to other employees then you are not going to meet this condition.
Likewise, if you grant yourself a $50,000 loan but only grant loans to employees of $10,000 then you are clearly being lent the money because of your position as a shareholder. Even if you do meet all three conditions you may still have to convince CRA which may be more trouble than it is worth. The risk of appearing to be lending to a shareholder (which is restricted due to section 15(2)) rather than to an employee which is generally allowed is usually high enough that shareholders avoid making loans to themselves. If a shareholder needs a car then there are alternative approaches that will allow the corporation to pay for the expense using pre-tax profits, such as allowances or buying the car itself as a corporate asset.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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