In 2011, Sunshine Publishing Ltd., a book publishing company with a fiscal year-end on December 31, made a loan of $100,000 to Stuart Sunshine, the president and majority shareholder. Both Stuart and Sunshine Publishing Limited are Canadian residents.
This is the first loan that Stuart ever received from the company, and it helped him finance the purchase of a new home which was built just outside Toronto, 10 kilometers farther from the corporate headquarters than Stuart's previous home. The loan was made on May 1, 2011, and a mortgage agreement was signed on that date. This agreement requires that the $100,000 owing be repaid over five years in equal installments of $20,000 on each anniversary date, starting on May 1, 2013, without interest. Early prepayments of principal are allowed.
Assume that the prescribed rates applicable to taxable benefits are: 6% for the first quarter of 2011, 8% for the second quarter, 9% for the third quarter, 7% for the fourth quarter and 6% for all of 2012. (Ignore the effects of a leap year.)
REQUIRED
(A) It is now December 2011 and Stuart has asked you to advise him on the tax consequences of the loan. It is not a company policy to make housing loans to employees and no other loans have been made to employees on similar conditions. What are the income tax consequences of this loan to Stuart in 2011 and 2012?
(B) If it was a company policy to make such loans to employees and other loans had been made to employees on similar terms and conditions, how would this change your answer to Part (A)?
(C) Assume the following facts: it was a company policy to make such loans to employees; other loans had been made to employees on similar terms and conditions; Stuart was a 9.5% shareholder rather than a majority shareholder; he was not related to any shareholders of the company; and the loan was to buy a rental property rather than a home. How would this change your answer to Part (B)?