Mr, Potter owns all the outstanding shares of Run for Your Life Limited, a health and fitness club. He is the company president. On July 1, 2016 the company made a loan to Mr. Potter of $19,500 which he used to acquire an automobile at fair market value. All of the other six employees of the corporation are eligible to receive this type of loan on the same terms and four have, in fact, taken advantage of the opportunity. He requires the automobile to carry out his business duties for the company. (He drives behind members of the club in case of an emergency while they are jogging.) The loan is repayable in two equal annual instalments starting July 2017 without interest.

REQUIRED

(1) Does Mr. Potter receive a taxable benefit in 2016? Substantiate your answer. (Ignore the effects of the leap year.)

(2) Can the company’s income position be affected either positively or negatively by this loan? Again, substantiate your answer.

Assume a prescribed rate of 4% throughout the relevant period in this problem. For a table of actual prescribed rates set out in Regulation 4301(1), see Chapter 14, or the table of Prescribed Quarterly Interest Rates in the Tables of Rates and Credits section in the preface materials of the Wolters Kluwer edition of the Canadian Income Tax Act with Regulations.