During its 2017 fiscal period ended December 31, 2017, MaggieMade Limited made two advances to

its sole shareholder and president, Ms. Maggie Forswater. The total advances were $350,000 and were recorded by Maggie as “Due from Shareholder”, a receivable in the books and records of MaggieMade Limited. Details of the advances are set out below.

A)

$320,000 was advanced to Maggie on March 1, 2017, to aid her in paying off her outstanding gambling debts. At the time of the advance, Maggie signed a note with the corporation agreeing to repay the principal at a future time with the interest of 2%. Any interest on the loan was paid at year-end. The loan was fully repaid on November 1, 2018. The company does not have a policy of making such loans to other employees and has never made a similar loan to an employee in the past.

B)

On January 1, 2017, $30,000 was advanced to Maggie to purchase a new car for herself. The car is used for employment purposes. The company has a policy of aiding its key employees to purchase automobiles that will be used to carry out their employment duties and has made such loans to other key employees in the past. At the time of the advance, Maggie signed a note with the corporation agreeing to repay the principal in equal installments of $10,000 plus 1.5% interest. The first payment of $10,000 plus related interest was due and paid December 31, 2017.

REQUIRED:

MaggieMade Limited is not in the business of lending money. Maggie has asked you to advise her on the tax consequences of the above advances. Consider the tax consequences for 2017 for each advance. Assume that the prescribed interest rates applicable to taxable benefits were 3% for all of 2017.

Answer rating: 100% (QA)

A The tax consequences for the 320000 advance are as follows The 320000 is considered a taxa... View the full answer