Do Repaid Loans Get You Out of the TOSI Rules? CRA Says Maybe

In CRA interpretation no. 2018-0771851E5, the CRA was asked whether a shareholder who does not actively participate in the business could be exempt from the tax on split income (TOSI) rules on the basis that he or she lent the company money in the past, which has since been repaid by the company several years earlier.

The particular facts were as follows:

  •  Mr. X and Mrs. X took out a mortgage on their home and lent it to a company.
  • Mr. X owned 100 non-voting common shares while Mrs. X owned 100 voting common shares of the company.
  • Mr. X was not actively involved in the company’s business.

Mr. X received a dividend from the company several years after the company repaid the loan. He does not qualify for the other TOSI exemptions (i.e., related business, excluded business, and excluded shares). Since Mr. X risked his family home by mortgaging it in order to lend the company money, the CRA was asked whether Mr. X is exempt from TOSI rules on the basis that the dividend is a reasonable return (see 120.4(1)(g)(i) (definition of “excluded amount”).

The CRA ruled that it would consider the fact that Mr. X risked his family home by mortgaging it to provide the loan. It would determine whether the company adequately compensated Mr. X for taking this risk, based on the terms of the loan. If not, the risk that was assumed by Mr.X in the past – when he mortgaged his home to provide the company loan – could be taken into account in determining whether a dividend received by Mr. X several years after the repayment of the loan is a reasonable return in respect of Mr. X.


ITA 120.4(1) excluded amount, in respect of an individual for a taxation year, means an amount that is the individual’s income for the year from, or the individual’s taxable capital gain or profit for the year from the disposition of, a property to the extent that the amount,

[…] (g) if the individual has attained the age of 24 years before the year, is […] (ii) a reasonable return in respect of the individual.

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