http://decision.tcc-cci.gc.ca/site/tcc-cci/decisions/en/item/64464/index.do 
Mast v. The Queen[1] (October 28, 2013) involved a loan by a corporation (Mastco) to its sole shareholder for the purpose of acquiring land and constructing a home:
[5] In 2004 or 2005, the appellant decided to build his dream home. He spoke with his accountant regarding how he could finance the construction and was told he could do it by borrowing money from Mastco. A resolution of the board of directors of Mastco passed on April 1, 2004 authorized Mastco to enter into a loan agreement with the appellant and his wife so that they could borrow up to one million dollars to enable them to acquire a dwelling for their own habitation. The loan agreement, signed on the same day, contained the following terms:
Loan Amount: The lender will make available to the borrowers a maximum amount of $1,000,000. Funds will be advanced as required to fund the acquisition of land and the cost of building a new house located at 93 Rue Oxford, Hudson, Quebec.
Loan Purpose: The purpose of the loan is to allow the lender’s president and his spouse to acquire a dwelling for their own habitation.
Loan Repayment: The loan will be repayable over a term of 10 years commencing with the company’s fiscal year ending March 31, 2008. Annual principal repayments shall be not less than $50,000. If the property is sold prior to complete repayment of the loan, the balance outstanding at the date of the sale shall become immediately due and payable.
Loan Interest: This loan shall be non-interest bearing.[2]
[6] No other security document was given to Mastco by the appellant. At the time the loan agreement was signed, the appellant did not foresee any problem in paying back the loan. The appellant, in the four years prior to the loan agreement, had had an average yearly remuneration of $238,892. After the loan agreement, his salary was reduced to an average of about $72,000 a year. According to Mastco’s accountant, the plan was for the appellant to repay the loan primarily out of bonuses or dividends.
The loan advances seem to have commenced in 2006:
[10] The total cost for building the appellant’s home was 2.6 million dollars. Of that amount, Mastco made advances totalling $999,572, of which amounts of $766,828, $97,551 and $53,260 were advanced in the 2006, 2007 and 2008 taxation years respectively towards the building costs. Those payments were made directly to the seller of land, the contractor, a paving company and other suppliers. The remaining costs were paid by the appellant and his wife from personal funds and their line of credit.
The ultimate advances totalled roughly $1,000,000; by 2013 the taxpayer had paid down that balance to $566,000:
[10] The total cost for building the appellant’s home was 2.6 million dollars. Of that amount, Mastco made advances totalling $999,572, of which amounts of $766,828, $97,551 and $53,260 were advanced in the 2006, 2007 and 2008 taxation years respectively towards the building costs. Those payments were made directly to the seller of land, the contractor, a paving company and other suppliers. The remaining costs were paid by the appellant and his wife from personal funds and their line of credit.
[11] The appellant paid back the loan to Mastco by making yearly payments starting in 2007. The balance remaining as of February 28, 2013 was $566,000. All the yearly payments were slightly above $50,000, except for one of $100,760 in 2008.
In order to avoid an income inclusion for the full amount of the loan the test that had to be met was found in paragraph 15(2.4)(f) of the
Income Tax Act[3]:
(f) at the time the loan was made or the debt was incurred, bona fide arrangements were made for repayment of the loan or debt within a reasonable time.
After reviewing the facts the court concluded that the arrangements did not meet the statutory test for such an exemption:
[30] There are other factors in the evidence submitted that are indicative of the underlying intent of Mastco and the appellant that the loan at issue was to be a shareholder’s loan. The appellant was in the habit of using Mastco to pay his personal expenses, including many related to the construction of his house; an employee would not have had such a benefit. Moreover, the financial statements of Mastco showed the advances under “loan receivable – shareholder” or “advance to shareholder”; the note that first appeared in the March 31, 2010 financial statement referred to “advance to shareholder”; the bank transactions provided to the CRA auditor indicate that all the payments made by Mastco for the construction of the house were entered under “shareholder loan”; no separate housing loan heading was created nor was the auditor provided with any breakdown between shareholder loan and housing loan amounts and no such information was ever communicated to the auditor at any time. These factors reflect a loan made to the appellant but are nevertheless an indication that, at the time it was made, the loan was intended to be made to the appellant in his capacity as a shareholder.
[31] Having concluded that the loan is consistent with its being one made to a shareholder, I do not have to consider, under paragraph 15(2)(f), whether, at the time the loan was made or the debt incurred, bona fide arrangements were made for repayment of the loan within a reasonable time. Suffice it to say that the loan agreement between Mastco and the appellant does not establish repayment obligations sufficient to create a bona fide repayment arrangement. A minimum payment of $50,000 a year over a 10‑year term with no specific rate of interest on a one‑million dollar loan does not constitute a bona fide repayment arrangement.
[1] 2013 TCC 309.
[2] While the loan was non-interest bearing the taxpayer did report a deemed interest benefit. Para. 9: The appellant did add to his income, as a benefit, deemed interest at a prescribed rate.
[3] R.S.C. 1985, c. 1 (5th Supp.), as amended.