Bob is the national sales manager of Francis Sales Ltd. He owns 12.5% of the common shares of

the corporation, having exercised stock options in previous years. He was not involved in the

financial management of the corporation. On June 9, 2020, he borrowed $200,000 from the

corporation, under its employee-loan policy applicable to all full-time employees, to finance the

purchase of a condominium for him to live in Dundas, Ontario, near the head office of the

company. Under the terms of the loan plan, Bob signed an agreement on the day he received

the loan to pay interest at 2% annually on the first day of each month during which the loan was

outstanding and to repay the principal in 20 equal annual instalments on January 1 of each year,

beginning January 1, 2022.

Required:

(a) Indicate each of the conditions necessary to exclude the principal amount of the loan from

Bobs income and indicate, briefly from the facts, how each condition is satisfied.

(b) Compute the amount of the interest benefit to be included in Bobs income in 2021 in respect

of the loan.

Assume that the prescribed interest rate for the second quarter of 2020 was 3% and the prescribed rates

for 2021 are:

Jan. 1 to Mar. 31 3%

Apr. 1 to June 30 2%

July 1 to Sept. 30 3%

Oct. 1 to Dec. 31 3%

(Show all supporting calculations and round to the nearest dollar.)