24 February 2000 External T.I. 1999-0004805 - 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.

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:

1. In a situation involving an employer-requested move, is the mere fact that the employee's move qualifies as an eligible relocation [defined in ITA 248(1)] sufficient to conclude, in accordance with ITA 80.4(1.1), that a third party loan to finance a house price differential would not have been received but for the employee's employment?

2. If there is clear evidence that a loan would not have been received by the employee but for the employment such that ITA 80.4(1.1) applies, would a benefit be computed under ITA 80.4, notwithstanding the introduction of ITA 6(23)?

3. With the introduction of ITA 6(23) and ITA 80.4(1.1), does the arrangement whereby the interest subsidy to the employee for the house price differential is provided via an interest-free loan from the employer result in the same taxable benefit as the arrangement whereby the employer pays the interest on a loan received by the employee from the third party lender?

Position: 1. No
2. Yes
3. Not necessarily

Reasons:

1. ITA 80.4(1.1) refers to a relationship between the loan/debt and the individual's office/ employment, as opposed to the individual's relocation. The relocation by itself, whether or not it qualifies as an eligible relocation, would be insufficient evidence to reasonably conclude that any loan/debt would not have been received/incurred by the individual but for the office or employment, within the meaning of ITA 80.4(1.1). Whether a loan is received because of employment is a question of fact based on the degree of involvement of the employer; e.g., the employer provides documentation to the lender to support the loan application, guarantees the principal and/or interest and pays the interest subsidy to the lender.

2. If an amount is included in income by virtue of ITA 80.4, a deduction may be available under ITA 110(1)(j) in respect of a home relocation loan [defined in ITA 248(1)]. If , based on the facts, ITA 80.4 and ITA 6(9) do not apply, then a benefit may be assessed under ITA 6(1)(a) and ITA 6(23).

3. The benefit on an interest-free loan is determined under ITA 80.4(1) and ITA 6(9). However, depending on the specific details of the arrangement, a benefit in respect of third party loans can arise either under ITA 80.4(1) and ITA 6(9) or under 6(23) and 6(1)(a).

XXXXXXXXXX 		1999-000480
S. Parnanzone
February 24, 2000

Dear XXXXXXXXXX:

Re: Housing Assistance - Loans from Third Parties

This is in reply to your letter of September 17, 1999, and is further to the telephone conversations with Mr. S. Parnanzone of this office concerning the above-noted matter.

You are concerned about situations in which there is an employer-requested move of an employee to a city with higher housing costs. The employer provides documentation to the third party lender to support the employee's loan application, pays for the interest on the increase in mortgage incurred by the employee after February 23, 1998, to finance the more expensive house at the new work location where the employee begins employment after October 1998, and the move qualifies as an eligible relocation as this expression is defined in subsection 248(1) of the Income Tax Act (the 'Act').

You posed this question:

With the introduction of section 80.4(1.1)(b), to the extent evidence clearly exists that " it is reasonable to conclude that...the debt would not have been incurred" were it not for the employee's relocation, notwithstanding the introduction of section 6(23), would the taxable benefit under such arrangements be computed in accordance with the provisions of section 80.4?

Your question is with reference to the comments regarding loans from third parties in paragraph 4 of Interpretation Bulletin IT-421R2, Benefits to individuals, corporations and shareholders from loans or debt, which predates the introduction of subsections 80.4(1.1) and 6(23) of the Act. Paragraph 4 of the bulletin indicates that where the employer provides documentation to the third party lender to support the employee's loan application, the loan will generally be considered to have been received because of employment for purposes of subsection 80.4(1). However, the bulletin also indicates that if the employee negotiates the loan without any involvement in the loan agreement by the employer or a person related to the employer, the loan is not considered to have been received because of employment for purposes of subsection 80.4(1) and, accordingly, any interest subsidization will be included in the employee's income pursuant to paragraph 6(1)(a) of the Act.

In your view, the mere fact that there is an employer-requested eligible relocation is sufficient evidence for a finding, in accordance with subsection 80.4(1.1), that any loan received or debt incurred by the relocating employee would not have been received or incurred but for the employee's office or employment. Accordingly, it is not necessary, in your view, for the employer to be involved in any manner in supporting the employee's loan application, as suggested in the mentioned bulletin, in order for the loan to be treated as having been received because of employment for purposes of subsection 80.4(1).

In your view, the same taxable benefit would arise whether the employer provides a low-interest or interest-free loan to the employee, or provides an interest subsidy in respect of a loan received by the employee from a third party lender.

Our Comments

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of assistance to you. Our comments do not address situations involving services being performed by a corporation carrying on a personal services business.

We do not share your interpretation of subsection 80.4(1.1) of the Act. This subsection clarifies that the intended use of funds that are advanced to a taxpayer is not relevant in determining whether the loan is received because of an individual's employment. Subsection 80.4(1.1) treats a loan or debt as having been received or incurred because of an office or employment if it reasonable to conclude that the loan or debt would not have been received or incurred, or its terms would have been different, but for the individual's employment.

Since subsection 80.4(1.1) of the Act refers to a relationship between the loan or debt and the individual's office or employment, as opposed to the individual's relocation, the relocation by itself, irrespective of whether or not it qualifies as an eligible relocation, would not, in our view, be sufficient evidence to reasonably conclude that any loan or debt would not have been received or incurred by the individual but for the office or employment, within the meaning of subsection 80.4(1.1).

It is a determination of fact whether, given a particular set of circumstances, it would be reasonable to conclude that the loan or debt from a third party lender would not have been received or incurred but for the individual's office or employment, such that the deeming provision of subsection 80.4(1.1) would be applicable. The determination would take into account the degree of involvement of the individual's employer, such as whether the employer provides documentation to the lender to support the employee's loan application, guarantees the principal and/or interest, and pays the interest subsidy to the lender.

If an amount is included in income by virtue of section 80.4 in respect of a loan from a third party, a deduction in computing taxable income may be available under paragraph 110(1)(j) of the Act in respect of a home relocation loan, as this expression is defined in subsection 248(1). However, if based on the facts, section 80.4 and subsection 6(9) do not apply to assess a benefit in respect of an interest subsidy arrangement provided by an employer, then a benefit may be assessed pursuant to paragraph 6(1)(a) and subsection 6(23) of the Act.

Where the employee receives a low-interest or interest-free loan from the employer to finance a house price differential at the new work location, a taxable benefit arises pursuant to subsections 80.4(1) and 6(9). However, where the employee finances the house price differential with a loan from a third party lender, it depends on the facts of the case, as indicated above, whether a taxable benefit arises by virtue of subsections 80.4(1) and 6(9) or subsection 6(23) and paragraph 6(1)(a).

We trust that the forgoing comments are of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch