20 April 2006 External T.I. 2005-0154531E5 - Application of Subsection 80.4(1)

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.

Principal Issues:

Does subsection 80.4(1) of the Income Tax Act apply to deem a benefit to employees under the group housing benefit plan?

Position:

Question of Fact. Subsection 80.4(1) applies however, the deemed benefit calculated is nil.

Reasons:

The employee is receiving the loan because of or as a consequence of their current employment however, the employee is paying interest at the federal prescribed rate.

								2005-015453
XXXXXXXXXX 							Luisa A. Majerus, CA
(613) 832-3488
April 20, 2006

Dear XXXXXXXXXX:

Re: Application of Subsection 80.4(1) of the Income Tax Act (the "Act")

This is in reply to your email dated October 16, 2005, requesting our views on whether there is a deemed benefit to the employees under a group housing benefit plan. We apologize for the delay in responding.

Specifically, you have indicated the following:

1) A mortgage broker will assist any employee of the employer to prepare an application to a mortgage lender to approve a mortgage for the purchase of a home;

2) The employer will provide references, employment history and employment verification to the mortgage broker;

3) The mortgage broker will negotiate a "reduced contract rate" which will be available to all employees based on the total volume and quality of business generated from the employees of the employer; and

4) The reduced contract rate will be less than the commercial lending rate but not less than the federal prescribed rate;

You have asked us whether subsection 80.4(1) of the Act applies to deem an amount to be a benefit in each of the scenarios noted below:

A) The employee is required to pay the mortgage lender directly for the principal and interest at the federal prescribed rate. The employer is required to pay the mortgage lender directly for interest owing, if any, between the reduced contract rate and the federal prescribed interest rate.

B) The employer is required to pay the mortgage lender directly for the principal and interest at the reduced contract rate. The employee will reimburse the employer for the principal and interest at the federal prescribed rate.

Our Comments

Subsection 80.4(1) of the Act provides, in part, that where a person receives a loan because of the current or intended office or employment of an individual, the individual shall be deemed to have received a benefit in a taxation year equal to the amount, if any, by which the total of:

(a) all interest on all such loans computed at the prescribed rate on each such loan for the period in the year during which it was outstanding, and

(b) the total of all amounts each of which is an amount of interest that was paid or payable in respect of the year on such a loan by a person that was employed or intended to employ the individual,

exceeds the total of:

(c) the amount of interest for the year paid on all such loans not later than 30 days after the end of the year, and

(d) any portion of the total determined in respect of the year under paragraph (b) that is reimbursed in the year or within 30 days after the end of the year by the debtor to the person who made the payment referred to in that paragraph.

It is a question of fact whether or not an individual receives a loan because of the current or intended office or employment. Subsection 80.4(1.1) of the Act provides in part that a loan or debt is deemed to have been received or incurred because of an individual's office or employment if it is reasonable to conclude that the terms of the loan or debt would have been different but for the individual's office or employment. The determination would generally take into consideration the degree of involvement of the individual's employer in securing the loan, for example, 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.

Based on the information you provided, it is apparent that a loan will be received because of the employment of the individual and therefore, subsection 80.4(1) of the Act would apply. However, the benefit under subsection 80.4(1) of the Act in either scenario above calculates to nil because the employee is paying interest at the federal prescribed rate.

In a situation where the provisions of section 80.4 of the Act are applicable and the benefit calculated under subsection 80.4(1) computes to nil, the CRA would not seek to apply the provisions of subsection 6(23) of the Act. Please note that if, based on the facts, subsection 80.4(1) of the Act does not apply to assess a benefit in respect of an interest subsidy arrangement provided by an employer, a benefit may be assessed pursuant to paragraph 6(1)(a) and subsection 6(23) of the Act.

We trust this information is helpful.

Yours truly,

Randy Hewlett
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch