Political Financing Handbook for Registered Parties and Chief Agents (EC 20231) – February 2018
This chapter discusses eligible sources of loans and how different loans and interest are reported. It covers the following topics:
- Getting a loan
- Types of loans
- Loan interest
- Repaying a loan
Getting a loan
Loans are used as a source of financing. The chief agent has to manage the registered party's finances properly to ensure that all loans are repaid.
A registered party may receive loans from either a financial institution or an individual who is a Canadian citizen or permanent resident. A registered party may also receive a loan from a registered association of the party. Loans from any other person or entity are not permitted.
A written loan agreement must accompany all loans.
Note: The chief agent has to report details of all loans in the annual financial return, including names and addresses of lenders and guarantors, loan and guarantee amounts, interest rates, and payment dates and amounts. If any information changes, the chief agent must send an update to Elections Canada without delay.
Loans from financial institutions
There is no limit to the amount a registered party can borrow from a financial institution. Note however that if the financial institution requires a loan guarantee, only a registered association of the party or individuals who are Canadian citizens or permanent residents can guarantee the loan. The amount an individual guarantees is subject to the individual's contribution limit.
Note: A financial institution must charge a fair market rate of interest on loans made to a registered party. Any forgone interest resulting from the financial institution charging a lower interest rate would constitute a non-monetary contribution from an ineligible contributor.
The registered party is planning to borrow $15,750 and the bank requires a guarantor for the loan. Because guarantees from individuals are subject to the contribution limit, the party needs at least 10 individuals to guarantee the requested amount. Each guarantor is limited to guaranteeing $1,575 of the total loan amount. Alternatively a registered association of the same party may guarantee the whole amount.
Note: This example uses the limits in effect for 2018.
Loans from a registered association
There is no limit to the amount a party can borrow from a registered association of the party. A registered association of the party can also guarantee loans obtained from financial institutions. There is no limit to the amount a registered association of the party can guarantee.
Loans from individuals
If an individual obtains a personal loan from a financial institution and lends those funds to a registered party, the lender is the individual and not the financial institution. The loan amount would be subject to the individual's contribution limit.
An individual can lend money to a registered party as long as the total of the individual's contributions, the unpaid balance of loans made that year and the amount of any outstanding loan guarantees made that year does not at any time exceed the contribution limit for the calendar year.
Note: An individual cannot make a loan to a registered party if the loan is made possible by the money, property or services of any person or entity that provided it to the individual for that purpose.
Paul made a $575 contribution to the registered party he supports. In addition, he takes out a $1,000 personal loan from his bank and lends it to the party. With that, Paul has reached the annual limit for contributions, loans and loan guarantees to the registered party.
Note: This example uses the limits in effect for 2018.
Types of loans
A term loan is repaid in regular payments over a set period of time. It may be either a fixed rate loan, allowing the borrower to lock in at a specific interest rate, or it may be a variable rate loan, where the interest rate fluctuates with the bank's prime rate and is calculated monthly.
A demand loan is a loan with no specific payment deadline. It is due whenever the lender demands to be repaid. It is recommended that the written loan agreement for a demand loan include a maximum term for the repayment.
Overdraft and line of credit
If overdraft protection or a line of credit is used, the maximum amount used is reported as a loan. Note however that if the financial institution requires a guarantee, only a registered association of the party or individuals who are Canadian citizens or permanent residents can guarantee the overdraft or line of credit. The amount an individual guarantees is subject to the individual's contribution limit.
The chief agent has to include the following information when reporting an overdraft or a line of credit:
- the maximum amount used
- the name and address of the financial institution
- the interest rate charged
- the dates and amounts of any repayments of principal and payments of interest
- the full name and address of any guarantors and the amounts they have guaranteed
- the unpaid balance at the end of each calendar year and as of the date of the return
The registered party's bank account has overdraft protection of $1,000. The account goes into overdraft by $200 and the chief agent pays back $100 within the same day. Later on that day, the chief agent withdraws another $400 from the same account, bringing the highest amount overdrawn during that year to $500. On December 31 the account is no longer in an overdraft position.
The maximum overdraft amount to be reported in the registered party's annual financial return is $500, while the balance on December 31 to be reported is nil.
The chief agent has to record the interest rate of each loan in the registered party's annual financial return.
Interest incurred on a loan is an expense, whether it is paid or accrued. The interest expense accrued during an election period on a loan obtained to finance an election campaign is an election expense.
If the interest rate on a loan from an individual is lower than the market interest rate, the chief agent will need to record the forgone interest as a non-monetary contribution from the individual.
Note: If the loan is from an individual who is not in the business of lending money and the forgone interest on the loan is $200 or less, the non-monetary contribution is deemed to be nil.
Repaying and reporting unpaid loans
There is no time limit for a registered party to repay its loans.
However, the registered party's annual financial return must include the following schedules related to unpaid loans:
- statement of unpaid loans
- previously reported loans that have been paid in full since the last fiscal period
- statement of loans that remain unpaid 18 or 36 months after their due date