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Question #12Ms

Finance

Question #12Ms. Janice Thiessen is an employee of Thiessen Ltd., a large company in which her husband owns 60 percent of theoutstanding shares.  Ms. Thiessen owns the remaining 40 percent of the shares.  Thiessen Ltd. has a December 31year end.  It is the policy of the Company to provide an interest free loan of up to $25,000 to any employee whowishes to acquire a new home.  They do not provide loans for home furnishings to employees.On April 1 of the current year, Ms. Thiessen receives a $25,000 interest free loan from the Company to purchase anew home.  On the same day, she receives an additional $15,000 interest free loan to purchase furnishings for thehome.  Both loans are to be repaid in four annual instalments to be made on March 31 of each year.  Assume theprescribed rate for the current year is 2 percent.  What are the current year tax implications of these loans for Ms.Thiessen?

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The $25,000 loan is the same as any other employee loan and is exempt from inclusion in income under ITA 15(2).  However, it is an interest free loan and will result in a current year taxable benefit for Ms. Thiessen of $375[($25,000)(2% - Nil)(9/12)].  Because Ms. Thiessen received the loan in her capacity as an employee, the benefitcan be calculated under ITA 80.4(1).  This means that for the first five years of the loan, the benefit calculation willuse a rate no higher than the prescribed rate that prevailed when the loan was made.The $15,000 loan is unavailable to other employees and will be subject to the general rule under ITA 15(2) as Ms.Thiessen is a specified employee.  However, there is an exception for the one-quarter of the loan that will be repaidprior to the end of the following taxation year of the corporation.  This means that, while three-quarters of the loan,or $11,250, will have to be included in income in the current year, the remaining one-quarter, or $3,750, can be leftout of income.  However, this latter amount will attract a current year taxable benefit of $56.25 [($3,750)(2% - Nil)(9/12)].This means the total income for the current year is $11,681.25 ($375 + $11,250 + $56.25).