Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Subject: FORGIVENESS OF EMPLOYEE LOANS Section(s): 6(15)]
XXX
920101
A. Humenuk
(613) 957-2134
XXX
February 10, 1992
Dear Sirs:
Re: Forgiveness of Employee Loans
This is in reply to your letter of January 3, 1992 concerning the amount that is to be included in an employee's income on account of an employer's forgiveness of the employee's debt.
In your letter you refer to the case of McIlhargey v the Queen [[1991] 2 C.T.C. 52] 91 DTC 5381, in which the Court held that the taxpayer had received an employment benefit which was taxable under paragraph 6(1)(a) of the Income Tax Act (the Act) based on the amount of the loan that was forgiven by the employer. The employee had received a loan from his employer to purchase shares in the employer corporation and the shares so acquired were held as security for the loan. When the employee's employment was terminated, the employee transferred all rights to the shares to a trust company which was holding the loan. The trust company then sold the shares and applied the proceeds from the sale of the shares to reduce the balance outstanding on the employee's loan. The employer forgave the balance of the loan, net of the proceeds received from the sale of the shares.
Subsection 6(15) of the Act, which was added after the events described in the above noted case, deems the value of such a benefit to be the amount, if any, by which the amount of the obligation outstanding at the time of the forgiveness exceeds the amount so paid, if any.
You wish clarification on how to determine the value of “the amount so paid” as it is used in subsection 6(15) of the Act in the following situation:
An employee receives a loan from his employer to purchase shares which are to be held in trust until such time as the loan is repaid. The employee is not related to the employer within the meaning of subsection 251(2) of the Act Dividends are flowed out to the employee from the trust and the employee directs the trustee on how to vote the shares at shareholders' meetings. In the event the employee's employment is terminated, the trust must surrender the shares to the employer and the employee's loan is forgiven. The employee is not permitted to repay the loan and keep the shares.
You ask whether the value of the shares surrendered in your example would be equal to the current publicly traded value of the shares or would it be equal to the value of the outstanding loan (based on the fact that the surrender of the shares is involuntary and the employee is not related to the employer). You ask whether our answer be different if the shares are thinly traded or if the employee also had the option of repaying the loan and keeping the shares.
The determination of the amount of the debt repaid by the employee is a question of fact which can only be determined upon review of all the relevant documentation. Where a payment on a loan is not monetary as in the case where the shares are forfeited, the amount of the payment is the fair market value of that non-monetary consideration. Where a stock is traded actively on a public stock exchange, the fair market value of the stock is generally considered to be the average trading price on the day on which the payment is made. Where a stock is thinly traded however, another valuation approach may be more appropriate. Refer to Information Circular 89-3 “Policy Statement on Business Equity Valuations” or contact the Valuations Services Section of the Audit Programs Directorate for further details on the Department's principles, practices and policies in this regard.
However, the fact that an employee must forfeit the stock in the event that the debtor's employment is terminated before the loan is repaid would not be determinative in establishing the fair market value of the shares so forfeited.
Consequently, it is our view that a benefit would be included in an employee's income under paragraph 6(1)(a) of the Act where the fair market value of the forfeited shares is less than the balance of the loan outstanding and that remaining balance is forgiven, regardless of whether or not the employee was obligated to sell the shares back to the employer.
We trust our comments have clarified our position in this matter.
Yours truly,
J.A. Szeszycki
for Director
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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© Her Majesty the Queen in Right of Canada, 1992
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© Sa Majesté la Reine du Chef du Canada, 1992
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