My client owns a corporation. His son is not activity involved in the business. He wants to lend his son money to start an investment. I have not dealt with TOSI in a while. It is my understanding…so I am told, since the son is related to the shareholder and not activity involved in the business, the loan will be treated as a loan. However, if the loan is not repaid by year 2, the son has to include the loan amount into income and be taxed at 54%. What are your thoughts? Please point me in the right direction, articles, etc.
Money lent from a father to his adult son attracts no attribution.
My understanding is that TOSI doesn’t apply unless the son is a shareholder of the corporation and the money is lent by the CORPORATION. If the son is not a shareholder, and the corporation lends money to him, it would be considered a shareholder draw by the father (this is per ITA 15, not 120.4).
Make sure the loan is highly papered with repayment terms and interest rates.
Documentation is key.
You can also have it set up as a prescribed rate loan using the CRA prescribed rates, which at the moment are 1%. The corp will issue a T4 to the son annually for the interest benefit based on the prescribed rates, which he will report on his personal tax return.
Alternatively, the same prescribed rate loan can be crafted between corp and father. The father then receives a T4A slip with the interest benefit to report on his personal tax return
The key is to have the documentation in place.
No, it can not. Even to the son who is not a shareholder but is related to the president/CEO of the company, the transaction is not at arms length. Back to back shareholder loan rule definitely applies here.