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Forgivable Loans – Are they Income or Property?

Date: 04 May, 2016

In another blog article, we discussed Restricted Share Units (RSU). These are examples of a golden handcuff by an employer to buy the loyalty of an employee. Another example of such golden handcuffs are forgivable loans. These are commonly offered to financial planners who move from one large investment house or bank to another. The book of business the planner brings to the Investment house is a valuable asset that they do not want to lose. An example of this situation is that upon such a move, the planner receives a “loan” as an example of $500,000.00, forgiven at the rate of $100,000.00 per year. For each year that the financial planner remains with the new employer, $100,000.00 of the loan is forgiven.

The courts and family law lawyers have grappled with how to treat such loans. The money (loan) is all received at a single time, and is available to the new employee to use as they see fit. Of course, hovering in the background, is the possibility that if the employee leaves, then the unforgiven part of the loan will have to be repaid. The amount of course is dependent upon the terms of the loan and how long the new employee has remained.

An argument is that all of this money, as it is directly in the hands of the new employee, should be treated as income, for support purposes, in the year in which it is actually received. Alternatively if the proceeds of the forgivable loan can be identified as of the date of separation, it should be an asset to be equalized.

This confusion has been cleared up in the case of Rogers v Rogers, a decision of Justice Young of the Ontario Superior Court. Justice Young held that only the amount each year that is forgiven is to be included as income. Only that portion that will be included in the financial planner’s taxable income in the year in question was to be treated as income, despite the fact that all of the money was already sitting in the financial planner’s bank account. By extension if it is income it is not property subject to equalization. Technically this would be accomplished by simply listing the offsetting portion of the part of the loan that has not been forgiven.