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. Follow-up to letter 2000-001088: Employer paying interest on two loans from third party to employee. The employer pays all the interest on the first loan of $25,000, which qualifies for a deduction under paragraph 110(1)(j). On the second loan of $75,000, the employer pays the interest in excess of the prescribed rates.
If instead of issuing two loans, the lender combines them into one loan with the employer paying the same amount of interest subsidy, would the net impact on the employee's taxable income be the same?
2. If under the terms of employment, a retiring employee is entitled to a final relocation with expenses paid by the employer would the employer paying the interest on the loan in excess of the prescribed rate result in a taxable benefit under section 80.4? As well, could such a loan be eligible for a deduction under paragraph 110(1)(j)?
Position TAKEN:
1. Question of fact.
Section 80.4 could apply. Paragraph 110(1)(j) would not apply unless retiring employee commenced employment at the new location.
Reasons:
Insufficient information provided to calculate benefits under each scenario.
Section 80.4 applies to loans received "because of or as a consequence of a previous, the current or an intended office or employment of an individual". Paragraph 110(1)(j) applies only to home relocation loans, which are received "in circumstances where the individual has commenced employment at a location in Canada".
XXXXXXXXXX 2001-008345
T. Young, CA
September 14, 2001
Dear XXXXXXXXXX:
Re: Interest Rate Buy-Down on a Mortgage
We are writing to reply to your letter of May 8, 2001, concerning the taxation of an interest rate buy-down on a mortgage by an employer. Your questions were in follow-up to our letter of March 28, 2000, (reference number 2000-001088) to you on the same subject. We also acknowledge our telephone conversation (Young/XXXXXXXXXX ) of August 10, 2001.
In your letter, you presented a hypothetical example where an employer pays the interest of 8% per annum on a $25,000 loan to an employee from a third party. The employee also has a $75,000 mortgage at 7% from the same lender. The employer pays the interest on the mortgage in excess of the prescribed interest rate of 6%. Further, the employee is eligible for a deduction under paragraph 110(1)(j) of the Income Tax Act (the "Act") for any taxable benefit pursuant to section 80.4 of the Act on the $25,000 loan.
As an alternative, you have proposed that, instead of incurring two separate loans, the employee borrows $100,000 as a single mortgage and the employer pays the same amount of interest subsidy to the lender. You have asked us if the resulting taxable benefit would be same as with the separate loans and what would be the T4 reporting requirements of the benefit.
You have also asked us if, under the terms of employment, a retiring employee were entitled to a final relocation with expenses paid by the employer, could the retiring employee be eligible for a deduction under paragraph 110(1)(j) in respect of a $25,000 interest-free loan or an interest rate buy down to the prescribed rate.
Written confirmation of the tax implications inherent in particular transactions is 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 70-6R4, Advance Income Tax Rulings, dated January 29, 2001. However, we are prepared to provide the following general comments, which may be of assistance to you.
As described in our previous letter, generally, in order for a loan to be subject to the provision of section 80.4 it must be "received or incurred because of an individual's office or employment". Otherwise, the amount of the taxable benefit to the employee under paragraph 6(1)(a) of the Act would be equal to the amount of the interest subsidy paid by the employer with no offsetting deduction available under paragraph 110(1)(j) in respect of a home relocation loan. For purposes of this letter, we have assumed that section 80.4 applies to the loans in question.
The calculation of the taxable benefit under subsection 80.4(1) is done on a loan-by-loan basis. Accordingly, the calculation of the taxable benefit under a combined loan would be different from the calculation for two loans. Whether the resulting taxable benefit in a given year would be the same would depend on factors such as the amount of interest paid during the year, the outstanding principal, and the amortization period of each loan.
If the loan or one of the loans qualifies as a home relocation loan, as defined in subsection 248(1) of the Act, a deduction in computing taxable income may be available under paragraph 110(1)(j). As is the case with the taxable benefit under section 80.4, whether or not the deduction would be the same under the two alternatives would depend on the specifics of the loans.
Therefore, in order to determine how an individual employee's taxable income would be impacted by different combinations of loans and loan subsidies, it is necessary to calculate the taxable benefit under section 80.4 and deduction under paragraph 110(1)(j), as applicable, under each scenario.
If an employee receives a taxable benefit under section 80.4, the employer must report the benefit on the employee's T4 slip. The benefit is included in the amount in box 14 (employment income) and is also shown separately using Code 36 in the "Other Information" area. If applicable, the amount of deduction available under paragraph 110(1)(j) for a home relocation loan is shown using Code 37 in the "Other Information" area of the T4.
For more information on the completion of T4 slips, please refer to the "2000 Employers' Guide - Filing the T4 Slip and Summary", which is available on our website at www.ccra-adrc.gc.ca.
With respect to your second question a loan received by a retired employee pursuant to an agreement entered into prior to the termination of employment generally would give rise to a taxable benefit under section 80.4, providing the other requirements of the section are met. However, a retiring employee generally would not be eligible for a deduction under paragraph 110(1)(j) in respect of the loan because the retiring employee would not be commencing employment at the new location.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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