Assisting A Childs Education - Tax Savings

When an individual is a shareholder of a corporation, or connected with a shareholder of a corporation, and receives a loan from that corporation, that individual must include the loan in income unless the loan was made:

1. To assist the employee, or a spouse of an employee to acquire a dwelling for his/ her habitation.      

2. To assist the employee to acquire treasury shares from the corporation or related corporation, or

3. To assist the employee to acquire an automobile to be used in the employment and bona fide arrangements were made for repayment within a reasonable time.

However, if the loan is repaid within one year, and the repayment is not a series of loans and payments, the amount will not have to be included in income. Also, if a company made the loan as part of its ordinary business of lending money, it will not have to be included in income.

This provision could be used to the advantage of a taxpayer:

Example

If Mr. Smith owned the shares of Company A, and his 18 year old daughter was attending University, Company A may lend, say, $10,000 to the daughter, and the daughter would have to include this amount in income. However, if this was her only income, and she also had tuition fees, the tax would be negligible.

This may be done to finance the University education for say four years. After graduation, and obtaining a job, the daughter may repay the $40,000 and deduct the repayment under paragraph 20(1)(j) from her employment income. Therefore, the loans have been included in income by the daughter in her low income University years and deducted in her higher income employment years. A tax savings of the difference in her tax rates can result.

Taxpayers should be aware that CRA may attack the transaction with an avoidance rule. Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

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