Albert Jay is an employee and 15 percent shareholder of Rick's Welding Shop Ltd. (Rick's). During the 2020 calendar year, Albert Jay was having cash flow problems. Rick's gave Albert Jay a loan of $5,000 on May 1, 2020 to help him out. Rick's also gave Albert Jay's son, Jake, a loan of $2,000 on September 30, 2020 to help him meet expenses while at college. Rick's has said that Albert Jay and Jake can repay the loans whenever they can afford it. The loans remain outstanding as at January 31, 2021. Rick's year end for accounting and taxation purposes is December 31. How much, and in which taxation year, is Albert Jay required to include in his Taxable Income as a result of the above transactions?

Question

Quizplus · Accepted Answer

According to the Income Tax Act, a shareholder who borrows from a corporation may be deemed to have received a taxable shareholder benefit unless the loan is repaid within one year after the end of the taxation year in which it was made.

In this case, Albert Jay received a loan of $5,000 on May 1, 2020, and as of January 31, 2021, the loan remains outstanding. Therefore, unless Albert Jay repays the loan by December 31, 2021 (one year after the end of the taxation year in which the loan was made), he will be deemed to have received a taxable shareholder benefit of $5,000 for the 2020 taxation year.

The $2,000 loan given to Albert Jay's son, Jake, does not affect Albert Jay's taxable income, as it was not given directly to him.

Albert Jay Is an Employee and 15 Percent Shareholder of Rick's