Transcript of Video on Getting a Loan
Political entities can use loans as a source of financing. This module explains the sources and types of loans. Some rules on administering loans are different for each entity, so we will discuss those rules in separate modules.
Loans can come from three sources: affiliated political entities, financial institutions, or individuals who are Canadian citizens or permanent residents.
A registered party can get a loan from any of its registered associations, while a registered association can get a loan from the party or another registered association. Candidates can also get a loan from the party or a registered association. Leadership and nomination contestants, however, cannot get a loan from other political entities.
When a political entity borrows money from a financial institution, there is no limit to the amount that can be borrowed, but the financial institution might ask for a loan guarantee. All political entities can get a loan guarantee from individuals who are Canadian citizens or permanent residents. A registered party can also get a loan guarantee from its registered associations, while a registered association can get a loan guarantee from the party or another registered association. Candidates can also get a loan guarantee from the party or a registered association.
When individuals lend money or guarantee a loan, they need to stay within the contribution limit. This means adding up all their contributions, the balance of unpaid loans, and outstanding loan guarantees made in that calendar year. The total cannot go over the individual's contribution limit at any time. Keep in mind that if an individual gets a personal loan from a financial institution and lends the money to a political entity, the lender is the individual and not the financial institution.
Depending on the lending and repayment conditions, we can identify four types of loans. Let's look at these next.
A term loan is repaid in regular installments, over a set period of time.
A demand loan has no specific repayment deadline. It is due whenever the lender demands to be repaid. As a best practice, the written loan agreement should include a maximum term for repayment.
Overdraft protection from a bank allows account holders to withdraw money even if they do not have sufficient funds in their account. Meanwhile, a line of credit gives the borrower access to a maximum loan balance. If a political entity uses its overdraft protection or line of credit, the maximum amount used in a reporting period is reported as a loan.
And finally, let's talk about loan interest.
Interest incurred on a loan, whether it is paid or accrued, is an expense and has to be reported in the political entity's financial return.
Only individuals, who are not in the lending business, can offer a lower interest rate than the market rate or ask for no interest on the loan. This is because the discounted amount, what we call “foregone interest,” is a non-monetary contribution. Given the limit on loans from individuals, any foregone interest would almost certainly be less than $200, so the non-monetary contribution would be deemed nil.
Here's one last general rule: No matter the source or type of loan, a written agreement must accompany all loans.
To learn how to administer loans for specific entities, please take a look at our other modules and resources.