Question

Jay is an employee and 15% shareholder of Rick's Welding Shop Ltd. (Rick's). During the 20X7 calendar year, Jay was having cash flow problems. Rick's gave Jay a loan of $5,000 on May 1, 20X7 to help him out. Rick's also gave Jay's son, Jake, a loan of $2,000 on September 30, 20X7 to help him meet expenses while at college. Rick's has said that Jay and Jake can repay the loans whenever they can afford it. The loans remain outstanding as at December 31, 20X8. Rick's year-end for accounting and taxation purposes is December 31.

How much, and in which taxation year, is Jay required to include in his taxable income as a result of the above transactions?

Question 6 options:

	1) $7,000 — 20X7
	2) $5,000 — 20X8
	3) $5,000 — 20X7
	4) $5,000 — 20X8

Answer 1

The answer is the 3rd option i.e. $5,000 - 20x7

Explanation:

Jay received a loan of $5,000 while the son received a loan of $2,000. The loans are founded on flexible terms because Rick allowed them to pay them when they can afford it. The loan given to Jay will be reported for tax purposes because it is considered as employee benefit due to the flexible loan terms. Jay is only liable for the loan he received. Jay will not be liable for the $2,000 loan given to son . The $2000 can be used as qualified education expenses by Rick who offered the loan. The loans are reported for tax purpose in the year they are received. The taxpayer, Jay will have to report the loans or benefits from the employer on the tax year 2007. Jay will therefore include $5,000 in his taxable income in 2007.