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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether a mortgage interest subsidy is subject to the application of subsection 80.4(1) of the Act or paragraph 6(1)(a) of the Act.
Position: In this particular situation, paragraph 6(1)(a) applies.
Reasons: Paragraph 80.4(1) of the Act does not apply by virtue of subsection 80.4(3) of the Act. Paragraph 6(1)(a) of the Act applies and, for greater certainty, subsection 6(23) of the Act applies.
December 19, 2001
XXXXXXXXXX Tax Services Office HEADQUARTERS
Verification and Enforcement Division A. Seidel, CMA
XXXXXXXXXX (613) 957-2058
Complex Business Enquiries
2001-010941
Mortgage Interest Rebate
This is in reply to your memorandum, dated November 5, 2001, requesting our views concerning the tax implications relating to the employee mortgage interest benefit program of XXXXXXXXXX.
Background
1. XXXXXXXXXX ("Company A") offers certain employees a "subsidized mortgage benefit" to assist them in the purchase of a "principal residence", within the meaning thereof in section 54 of the Act.
2. XXXXXXXXXX ("Company B") is a wholly-owned subsidiary of Company A.
3. The subsidized mortgage program consists of the following:
? The Company A employee negotiates a mortgage with Company B at posted mortgage rates and with terms and conditions that are no different than those that Company B would offer to any other individual obtaining a mortgage from Company B.
? Company A provides no assistance to its employees in terms of obtaining a mortgage.
? Once the mortgage is in effect, the Company A employee will make regular mortgage payments to Company B pursuant to the terms of the mortgage.
? Company A only provides the mortgage interest subsidy to certain of its employees. The amount of the subsidy depends on the employee's position in the company and the number of years of service to the company.
? A Company A employee who qualifies for a mortgage interest subsidy must obtain the mortgage from Company B, no one else, and the employee cannot negotiate for an interest rate that is better than the posted rate for mortgages offered by Company B to non-employees.
? The amount of the subsidy is calculated and included in the last paycheck of each month for each Company A employee. The upper limit for the subsidy is XXXXXXXXXX% of the actual interest paid on a maximum mortgage of $XXXXXXXXXX.
4. Company A computes the benefit to its employee pursuant to subsection 80.4(1) of the Income Tax Act (the "Act").
Issue
Is the mortgage interest subsidy a benefit to the employee that is to be computed pursuant to subsection 80.4(1) of the Act and included in computing employment income pursuant to subsection 6(9) of the Act, or is the benefit equal to the amount received by the employee each month and included in computing employment income pursuant to paragraph 6(1)(a) and subsection 6(23) of the Act?
Taxpayer's Position
(a) Section 80.4 of the Act should apply, as it is a provision to eliminate the abuse of an employee receiving an unreasonably low interest rate on borrowings.
(b) Company A's "XXXXXXXXXX" is clearly just a means of reducing the effective interest rate of its employees' mortgages.
(c) Many of the staff would probably not have chosen to use Company B to get their mortgages without the program, or at least would have tried to negotiate an improved interest rate.
(d) Company B cannot issue mortgages at less than market rates or the mortgages would not qualify as "Mortgage Backed Securities". This is why the refund system is used.
Tax Services Office Views
Section 80.4 of the Act is not applicable as a result of subsection 80.4(3) of the Act.
The interpretation provision of subsection 80.4(1.1) of the Act is not met.
Paragraph 6(1)(a) of the Act is applicable to the mortgage subsidy benefit program.
Analysis
Subsection 80.4(1) of the Act applies, amongst other things, to a loan received, or a debt incurred, by an individual because of, or as a consequence of, the current office or employment of the individual.
Subsection 80.4(4) of the Act provides special rules in respect of a "home purchase loan", as defined in subsection 80.4(7) of the Act, or a "home relocation loan", as defined in paragraph 110(1)(j) of the Act.
Subsection 80.4(1.1) of the Act, amongst other things, deems a loan to be received, or a debt to be incurred, because of an individual's office or employment, if it is reasonable to conclude that, but for the individual's current office or employment, the terms of the loan or debt would have been different.
Subsection 80.4(3) of the Act provides, amongst other things, that subsection 80.4(1) of the Act does not apply in respect of any loan or debt, or any portion thereof, on which the rate of interest was equal to or greater than the rate that would, having regard to all of the circumstances (including the terms and conditions of the loan or debt), have been agreed on, at the time the loan was received or the debt was incurred, between parties dealing with each other at arm's length if none of the parties received the loan or incurred the debt by virtue of an office or employment and the ordinary business of the creditor included the lending of money. There is, however, an exception to this exception. It applies where any amount is paid or payable in a taxation year to the creditor, in respect of interest on the loan or debt, by a party other than the debtor.
Subject to the exceptions enumerated therein, paragraph 6(1)(a) of the Act includes, in computing the income of a taxpayer for a taxation year, as income from an office or employment, the value of benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment
For greater certainty, subsection 6(23) of the Act provides that, amongst other things, an amount paid or the value of assistance provided by any person in respect of, in the course of or because of, an individual's office or employment in respect of the financing of a residence, is, for the purposes of section 6 of the Act, a benefit received by the individual because of the office or employment.
The first requirement in subsection 80.4(1) of the Act is that the loan or debt is "because of or as a consequence of ... the current ... office or employment of an individual". Subsection 80.4(1.1) of the Act specifies that a loan or debt is deemed to have been received or incurred because of an individual's office or employment when it is reasonable to conclude that, but for the office or employment, the terms of the loan or debt would have been different. Pursuant to the submission of the taxpayer, "many of the staff would probably not have chosen Company B to get their mortgages without the program, or, at least, would have tried to negotiate an improved interest rate". It is therefore reasonable to conclude that these mortgages have been received because of their office or employment. This program is distinguishable from the situation described in paragraph 4 of Interpretation Bulletin IT-421R2 ("IT-421R2"), where an employee actually negotiates a mortgage with a lender at the most favorable terms that the employee can get and the employer does not get involved in the negotiation of the terms of the mortgage.
However, subsection 80.4(3) of the Act provides that subsection 80.4(1) of the Act does not apply "in respect of any loan or debt, or any part thereof, on which the rate of interest was equal to or greater than the rate that would, having regard to all of the circumstances, have been agreed on" by persons dealing with each other at arm's length. Under this particular program, the employees of Company A must accept a mortgage from Company B at the posted interest rates of Company B and the employees of Company A make regular mortgage payments to Company B. Accordingly, by virtue of paragraph 80.4(3)(a) of the Act, subsection 80.4(1) of the Act would not apply to the mortgages received by the employees of Company A. Finally, since subsection 80.4(1) of the Act does not apply to these mortgages, there is no benefit computed there under and subsection 80.4(4) of the Act is not applicable.
Subject to certain exceptions, subsection 6(1) of the Act provides that "there shall be included in computing the income of a taxpayer ... as income from an office or employment such of the following amounts as are applicable". Paragraph 6(1)(a) of the Act provides that "the value of ... other benefits of any kind whatever received or enjoyed by the taxpayer in the year in respect of, in the course of, or by virtue of an office or employment" are income to the employee. The reimbursement of any personal expense of an employee, by an employer, including mortgage interest, is considered to be a benefit received by the employee. Accordingly, the mortgage interest subsidy included in the last monthly pay of a particular employee would be considered to be a taxable benefit to the employee. The Company A mortgage interest subsidy program is identical to the situation, described in paragraph 4 of IT-421R2, where the employer subsequently subsidizes the employee's mortgage interest. Our long-standing position, as stated in paragraph 4 of IT-421R2, is that "[I]n such a situation, any benefit enjoyed by the employee as a result of the subsidization of the interest costs would be included in income by virtue of paragraph 6(1)(a) of the Act".
Finally, subsection 6(23) of the Act was enacted "for greater certainty". It provides that any amount paid, by any person, in respect of, in the course of or because of, an individual's office or employment in respect of the financing of a residence is a benefit received by the individual because of the office or employment. The mortgage interest subsidy is an amount paid in respect of the financing of the employee's residence and, as discussed above, it is reasonable to conclude that these mortgages have been received because of their office or employment, such that subsection 6(23) of the Act would apply to any amount received by an employee of Company A.
We hope our comments are of assistance. If you wish to discuss any of the above further, do not hesitate to contact us at the above number.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.
John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 5 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2001
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2001
Email this Content