Reference no: EM132862033

Question - Ms. Biden is the vice-president of Marketing with Dundas Manufacturing Ltd. She is one of a group of eight senior executives who have been granted options to purchase from the corporation unissued non-voting Class B common shares of the corporation. She presently owns 15% of these shares. In order to assist this group of employees to acquire shares under the stock option plan, the corporation provides loans at low interest rates under an established policy approved by the Board of Directors.

On April 1, 2021, Ms. Biden borrowed $50,000 to enable her to exercise some of her stock options. She signed a note promising to repay $10,000 of principal on the anniversary date of the loan in each of the next five years and to pay interest at a rate of 1% per year paid quarterly. Assume that the prescribed rates in 2021 were: first quarter, 3%; second quarter, 3%; third quarter, 2%; fourth quarter, 3%.

Required -

1. Advise Ms. Biden of the 2021 Division B income tax effects to her of receiving the loan amount of $50,000, in particular discuss the following:

a. Application of s.15(2) of the Income Tax Act, and

b. Application of s.15(2.4) of the Income Tax Act

(Support your advice with specific section references to your answer.)

2. Compute imputed interest benefit of paying interest of 1% to the corporation.

3. Compute allowable interest deduction, if any, under s.20(1)(c) of the Income Tax Act.

Note: Please be complete in your analysis of these features of the loan in respect of the likely provisions of the Act that could apply.