Problem: Fern Stoves Limited ("FSL") is a Canadian-controlled private corporation ("CCPC") with a December 31year-end. The company is a Canadian distributor of corn-fuelled stoves operating from its head office in Milverton, Ontario.
Today is December 25, 2020 and Tony Fern, the sole shareholder and president of the company, has requested a meeting with you to discuss various tax issues related to the company's December 31, 2020 taxation year-end. At the meeting he provided you with the following information.
Tony received a $100,000 1% loan, dated July 1, 2020 to enable him to purchase a new home for his own occupancy. Other senior employees of FSL are eligible for, and have received, loans on similar terms. The loan was repayable over 10 years in equal installments of principal payable on the anniversary date, but with interest payable monthly.
Required:
Provide Mr. Fern with a detailed analysis of the tax consequences to him of the above transaction for the year ending December 31, 2020, with calculations and specific dates where necessary.
Assume that the prescribed interest rate for the first quarter of 2020 was 2%, for the second quarter it was 1%, for the third quarter it was 1.5%, and for the fourth quarter it was 1.25%.