Tuesday, April 15, 2014

Gift and loan back arrangements - some frequently asked questions

Recent posts have looked at various aspects of the 'gift and loan back' strategy (see http://mwbmcr.blogspot.com.ar/2014/03/leading-gift-and-loan-back-case.html and http://mwbmcr.blogspot.com/2014/04/subdivision-ea-giftloan-back.html

While there are a myriad of potential issues that always need to be considered, some of the key aspects include:
  1. care should always be taken to ensure that the trust which will make the secured loan does not itself conduct risky activities (for example, run a business). 
  2. while the arrangement can be entered into without registering a mortgage, if this step is not taken, the trust that has made the loan will simply be an unsecured creditor. 
  3. the impact of the arrangement in relation to potentially accessing the small business tax concessions should always be carefully considered, because while a family home will generally be excluded from the $6 million test, a secured loan will generally be included if the trust is an affiliate or ‘connected entity’ under the Tax Act (which will typically be the case). 
  4. to the extent that a third party financier already has a mortgage over the property, they will generally require a deed of priority securing their lendings (to whatever level they may be from time to time) as a first priority before the trust's second mortgage. 
  5. As flagged in previous posts (http://mwbmcr.blogspot.com/2013/10/one-remedy-where-trust-distributions.html) if no real property is available for registering security over, personal property can be used via the Personal Property Security Register
Until next week.

Image credit: Alexander Henning Drachmann via Flickr