18 October 1985 Income Tax Severed Letter A-1643 - [Employee housing loans]

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.

P.D. Fuoco Tel. (613) 993-7295

October 18, 1985

Dear Sirs:

This is in reply to your letter of June 27, 1985 in which you request our opinion with respect to the tax consequences of certain transactions relating to employee housing loans. We regret the unavoidable delay in responding.

The situation you describe in your letter is one in which the employer, in relocating several employees, made interest-free and low-interest loans to the employees to assist in the purchase of houses for their personal occupation. Because of the circumstances of the real estate market in the areas to which the employees were relocated, some of them have suffered major unrealized losses on their homes to the extent that their financing on the homes now exceeds the present fair market value of the homes. The employer proposes to purchase the houses from the employees. As consideration for the purchase, the employer will cancel the interest-free and low-interest loans and make a cash payment to the employee equal to a portion of the employee's original cash equity. By way of illustration, you have provided us with the following example

Assume

Employees' cash down payment            $ 35,000
Interest-free and low-interest loans        145,000
Total purchase price - 1981                    180,000
Unrealized loss                                        (50,000)
Current market value                              130,000

As a result of the proposal, the interest-free and low-interest employee loans of $145,000 would be cancelled. In addition, the employee would receive a cash payment of approximately $25,300 calculated with reference to his initial equity (i.e. $35,000 $130,000/$160,000).

In our opinion, the cancellation of the loans on the sale represents a forgiveness of $15,000, the value of which would be included in the employee's income as a taxable benefit under paragraph 6(1)(a) of the Income Tax Act. The cash payment of $25,300 would likewise be included in the employee's income for tax purposes.

We regret our reply could not be more favourable.

Yours truly,

for Director Non-Corporate Rulings Division