1. Client has set up a Trust which has purchased a house which has been financed by a loan. The majority (but not all) of the beneficiaries live in the house. Does the loan holder have to charge interest on the loan? 2. If the loan holder is a connected T
Important:
This answer is based on tax law for the year ending 28 February 2020.
Answer:
The Income Tax Act doesn’t prescribe that interest must be charged on a loan.
Whether or not the loan is subject to interest is determined from the agreement in place between the trustees and the beneficiaries.
From your questions we suspect that your request relates to section 7C(5)(d). To state the principle again: if the trustee is a connected person in relation to the trust, and used the asset as a primary residence, then to the extent that the loan financed the acquisition of the primary residence, section 7C(5)(d) will apply. This means that section 7C will then not apply.
The “used that asset as a primary residence” phrase needs further elaboration. The words used in section 7C(5)(d) are, “the person referred to in subsection (1)(a) or the spouse of that person used that asset as a primary residence as contemplated in paragraph (b) of the definition of ‘primary residence’ in paragraph 44 of the Eighth Schedule throughout the period during that year of assessment during which that trust or company held that asset”.
The connected person, and or spouse of that person doesn’t have to be beneficiaries of the trust, for purposes of section 7C(5)(d), but if relatives, other than a spouse, used the residence, it would not qualify.