28 March 2000 External T.I. 2000-0010885 - INTEREST RATE BUY-DOWN RELOCATION

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: Does subsection 80.4(1.1) apply in an employer requested move?

Position: It depends.

Reasons: 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.

		2000-001088
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
Attention: XXXXXXXXXX 

March 28, 2000

Dear Sir/Madam:

Re: Interest Rate Buy-Down on a Mortgage

We are writing in reply to your letter of February 28, 2000 in which you requested our comments on whether an interest rate buy-down on a mortgage, by an employer, would be taxable under subsection 80.4(1.1) of the Income Tax Act (the "Act").

You have provided us with the following facts:

• The employee is being relocated due to employment (i.e. transferred at employer's request).
• The employee will be obtaining a mortgage for the purchase of a home in the new location in Canada.
• The rate buy-down will only apply when the employee relocates at least 40 kilometres from the current work location.
• The mortgage interest rate will not be brought down below the prescribed rate.
• The rate buy-down period shall not exceed a five year term.
• The employer is represented by a relocation services firm who act as their agent.
• The employer (or his agent) will advance the money required to buy-down the rate directly to the mortgage lender. This money will be advanced as a lump sum to the mortgage lender. The money will under no circumstances be advanced to the employee. All transactions regarding the buy-down will take place between the employer (or his agent) and the mortgage lender.
• The mortgage lender will provide an annual statement of the interest paid by the employer in each taxation year.

Our Comments:

Written confirmation of the consequences inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. Although an advance income tax ruling will not be issued on this matter, we have provided you with the following comments which are of a general nature and are not binding on the Department.

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.

Generally, subject to subsection 80.4(4) the benefit in respect of a loan or debt described in subsection 80.4(1) is the amount by which the aggregate of:

(a) interest calculated at the prescribed rate(s) for the year, on the total of all such loans and debts outstanding during the year, and

(b) the aggregate of all interest paid or payable in respect of the year on the loans or debts by any of the following persons:

(i) the employer or intended employer of the individual,

(ii) any person (except the debtor) related to the employer,

(iii) a person or partnership which is, or will be, the recipient of services performed or to be performed by a corporation carrying on a personal services business, or

(iv) a person except the debtor) that does not deal at arm's length with the person or any member of the partnership referred to in (iii) above,

exceeds the aggregate of

(c) any interest for the year paid by any person or partnership in the year or within 30 days thereafter on any such loans or debts, and

(d) any portion of an amount described in (b) above in respect of the year that is reimbursed in the year or within 30 days thereafter by the debtor to a person or entity described in (b) above who made the payment.

Thus, in your situation, if by virtue of subsection 80.4(1.1), subsection 80.4(1) applies, and, as indicated the mortgage rate an employee pays will never fall below the prescribed interest rate, the calculation above would result in a nil benefit. We have enclosed IT-421R2 Benefits to Individuals, Corporations and Shareholders from Loans or Debt which provides several examples of the benefit calculation.

If ever an amount is included in income by virtue of section 80.4 in respect of a loan from a third party (where, for instance, in your situation, the employee pays interest at a rate below the prescribed rate), 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).

If the provisions of section 80.4 are applicable and the benefit calculated under subsection 80.4(1) computes to nil, we would not seek to apply the provisions of subsection 6(23) of the Act. In such a situation, a T4 would not be required.

However, if based on the facts, section 80.4 does 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.

We trust our comments will be of assistance to you.

Yours truly,

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

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