[Maggie-G]

Corporate Backgrounder - Fiscal YE 2006

a. In 2003 the company obtained a long-term promissory note ($100,000) from a shareholder (regular taxpayer) who holds 7% of issued common stock. Below is an outline of the terms:

'Due to individual shareholder. Loan repayable in monthly installments of $X,XXX plus interest at CIBC prime commercial lending rate. The transaction refinanced a previous debt to X Bank, and is in the normal course of business (the terms of repayment and interest rate was established and agreed to by the parties). The transaction approximates the arm’s length equivalent value for the debt.'

b. Interest on this debt has accrued since fiscal 2003 and was never capitalized

c. The note has never been re-written. Shareholder who granted loan does expect to collect interest whenever (if ever) the company sells.

d. I have read IT109R. But am not sure if this is applicable. If it is, the shareholder who granted the loan has not reported any accrued interest the corporate has written off. The corporate return is so late, I feel that filing a T2047 (Agreement in respect of Unpaid Amounts) would not be the best handling of the situation.

Other info
Since 2003 the same shareholder has loaned the corporation and additional $60,000 Not due within one year, no specific terms of repayment.

Q.
1. Based on the scenario, do you think IT109R comes into play, OR

2. As the grantor of the loan has not reported this accrued interest would it be better to bring 100% of the interest previously written off, back into corporate income? (Loss carry forwards would still wipe out any corporate tax liability)

3. Any other suggestions on how to report this transaction on the T2 Financials?

Thank you

[JohnNP]

Maggie-G, on Oct 28 2008, 03:41 PM, said:

b. Interest on this debt has accrued since fiscal 2003 and was never capitalized

the corporation is potentially minimally facing non-filing penalties and interest for the five years for t5s etc
the individual is potentially minimally facing incorrect t1 filing penalties and interest for the five years

suggest getting a tax accountant to review the details of both the individual and the corp for each of the five problem years

[Maggie-G]

JohnNP, on Oct 28 2008, 05:24 PM, said:

the corporation is potentially minimally facing non-filing penalties and interest for the five years for t5s etc
the individual is potentially minimally facing incorrect t1 filing penalties and interest for the five years

suggest getting a tax accountant to review the details of both the individual and the corp for each of the five problem years

Thanks for your input JohnNP.
Unfortunately, this Corp does not have the funds to pay for professional advice it requires. I was trying to help.

Thought maybe there was someway around Section 78 (which deals with unpaid amounts) It does not deny the deduction of a bona fide expense (which this was) to a taxpayer in the year that it is incurred. It does, however, provide that either the taxpayer or the non-arm's length person will include the amount in income in the third taxation year following the year in which the expense is incurred.

[JohnNP]

Maggie-G, on Nov 9 2008, 01:50 PM, said:

Unfortunately, this Corp does not have the funds to pay for professional advice it requires.

in that case, the corporations director should check the yellow pages or professional association website for a referral to a bankruptcy trustee


and on the personal side, unfortunately if the shareholder does not have a professional tax accountant for his personal tax, his tax disadvantage and tax payable and penalties and interest are likely to calculate significantly higher than the professional fees he otherwise would have paid.

care should be excercised in bringing this transaction/series of transactions into compliance