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.
Principal Issues:
whether the exercise of an option to port a mortgage to a new property creates a new loan when none of the terms of the mortgage are changed (other than the property used to secure the mortgage)
Position:
generally no
Reasons:
parag 6 of it-448 states that a substitution of security will not ordinarily cause a loan to be treated as a new loan
962005
XXXXXXXXXX A. Humenuk
Attention: XXXXXXXXXX
November 12, 1996
Dear Sirs:
Re: Taxable Benefit from a Low Interest Portable Mortgage Loan
We are replying to your letter of May 29, 1996, in which you ask which prescribed rate should be used to calculate an employee's taxable benefit under subsections 80.4(1) and (4) of the Income Tax Act (the Act) after the employee's low interest loan from the employer has been ported or transferred to a new mortgaged property. The resolution of this question depends on whether an employee housing loan will be considered a new loan for the purpose of determining the taxable benefit under subsection 80.4(1) of the Act when the employee substitutes a new property as the security for the loan.
In the situation you describe, XXXXXXXXXX, which is a financial institution, offers its employees mortgages at rates lower than that generally offered to its customers. One type of mortgage offered by XXXXXXXXXX is a portable mortgage. Under the terms of a portable mortgage, a customer may substitute a different property for the property which originally secured the mortgage, without necessarily renegotiating the terms of the mortgage. The customer has the option of increasing the amount of the principal or negotiating a partial change in the terms of the loan, subject to verification by XXXXXXXXXX that the mortgage continues to meet its credit requirements.
For the employer's accounting and administrative purposes, a loan will be treated as a new loan when a customer, including an employee, exercises his or her option to "port" an existing mortgage to a new property. The reason for this is that the Canada Mortgage and Housing Corporation which insures the mortgages requires a loan to be treated as a new loan when the real property securing the mortgage is changed.
As stated in our previous correspondence to you of January 28, 1991, it is a question of fact as to whether a particular change to the terms and conditions of a loan creates a disposition of that loan and forms a new loan. When an employee exercises the option to "port" an existing mortgage and any of the terms of the mortgage as listed in paragraph 7 of Interpretation Bulletin IT-448 "Dispositions - Changes in Terms of Security" are changed, it is our view that a new loan has been created and that any benefit determined under subsection 80.4(1) of the Act should be calculated with reference to the prescribed rate at that time.
When an employee "ports" an existing mortgage to a new property (so that the only change is in the underlying security) in accordance with the original terms of that mortgage and there is no change in any of the conditions of the loan, including principal, interest rate, repayment schedule, amortization period and maturity date, the loan will not be considered to be a new loan for the purpose of determining the prescribed rate to be used under subsection 80.4(1) of the Act. In this regard, the comments in paragraph 6 of IT-448 are applicable.
We trust our comments will be of assistance to you.
Yours truly,
John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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