Ameen owns all of the shares of XYZ Ltd, which has a December 31 year end. Ameen also works as an employee in the business full time. When Ameen first started XYZ, they set up a policy whereby any employee of the company is allowed to borrow $35,000 interest free. The loan must be used to purchase a car that they use in the course of their employment, for driving to work, visiting clients, going on work related trips, etc. The employees are also allowed to use the car for personal purposes. This is the only policy the company has regarding loans to employees.

 

The company policy is that the loan must be repaid within 4 years. The employees can choose automatic withdrawals from their paycheques over the 4-year period or they can repay a lump sum at the end of each taxation year.

 

In February of 2023, Ameen decided to purchase a new car and took a loan from XYZ to fund the purchase. The terms follow the policy, the loan is interest free and Ameen plans on repaying a portion of the loan at the end of the taxation year.

 

Required:

 

Explain the consequences of the loan for Ameen's 2023 taxable income.

 

Assume that the prescribed rate for all of 2023 is 2 percent.