2009 Ruling 2008-0290481R3 - Housing Assistance Program

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: 1. Will an interest-free loan from an employer to an employee give rise to a taxable benefit?

2. Will forgiveness of an interest-free loan from an employer to an employee give rise to a taxable benefit?

3. Will interest paid by the employer to an institutional lender in respect of an employee's mortgage give rise to a taxable benefit?

Position: 1. Yes. 2. Yes. 3. Yes

Reasons: 1. There will be a deemed interest benefit to the extent provided under subsections 80.4(1), 6(9) and 6(23) of the Act.

2. The forgiven amount will be deemed to be a benefit by subsections 6(15) and 6(23) and included in income by paragraph 6(1)(a) of the Act.

3. There will be a deemed interest benefit to the extent provided for under subsections 80.4(1), 6(9) and 6(23) of the Act.

XXXXXXXXXX 			2008-029048

XXXXXXXXXX , 2009

Dear XXXXXXXXXX ,

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , wherein you requested an advance income tax ruling on behalf of the above-noted entity. We acknowledge the receipt of additional information submitted in XXXXXXXXXX , as well as various telephone conversations from XXXXXXXXXX

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request:

(i) is in an earlier return of a taxpayer or a related person;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of a taxpayer or a related person;
(iii) is under objection by a taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal
to a higher court has not expired; and
(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Definitions

(a) "Aggregate Interest Amount" means the total amount of interest to be paid by the Employer under the Mortgage Interest Assistance Program in respect of a Mortgage advanced to a Participating Employee by a Lender.

(b) "Arm's Length" means Arm's Length as that expression is defined in section 251 of the Act.

(c) "Commencement Date" in respect of a Participating Employee means the later of the date on which the Participating Employee's Qualified Employment commences and the first date on which a benefit is paid to or for the benefit of a Participating Employee under the Housing Assistance Program.

(d) "Down Payment Assistance Program" means that component of the Housing Assistance Program under which the Employer will provide a Participating Employee with an interest-free loan to assist a Qualified Purchaser in respect of the Employee to purchase a Qualified Residence.

(e) "Eligible Employee" means an individual in respect of whom each of the following conditions is satisfied:

(i) The individual is employed in Qualified Employment;
(ii) A Qualified Purchaser in respect of the individual is purchasing a Qualified Residence;
(iii) The Qualified Residence will be purchased at some time in the period commencing XXXXXXXXXX months prior to and ending XXXXXXXXXX years following the commencement by the individual of Qualified Employment (provided that, for greater certainty, such commencement in respect of a senior management staff member contemplated in item (IV) of the definition of Qualified Employment shall refer to the later of the date of the required approval in writing in respect of such senior management staff member and the date on which such employment as a senior management staff member commenced);
(iv) The individual has not previously participated in the Housing Assistance Program or the Predecessor Program; and
(v) The individual is employed on the XXXXXXXXXX of the Employer.

(f) "Employee" means an individual employed by the Employer.

(g) "Employer" means the XXXXXXXXXX .

(h) "Financial Institution" means a "bank" or "credit union" as those expressions are defined in subsection 248(1) of the Act.

(i) "Housing Assistance Program" means the Employer's proposed employee incentive program consisting of two components, namely the Down Payment Assistance Program and the Mortgage Interest Assistance Program.

(j) "Lender" means a Financial Institution with which the Employer has made arrangements to provide Mortgages to Participating Employees under the Mortgage Interest Assistance Program.

(k) "Loan" in respect of a Participating Employee means an interest-free loan made by the Employer in respect of the purchase of a Qualified Residence under the Downpayment Assistance Program.

(l) "Metropolitan Area" means the area governed by the XXXXXXXXXX .

(m) "Mortgage" in respect of a Participating Employee means a loan made by a Lender to a Qualified Purchaser in respect of the Participating Employee for the purpose of purchasing a Qualified Residence under the Mortgage Interest Assistance Program.

(n) "Mortgage Interest Assistance Program" means that component of the Housing Assistance Program under which the Employer will pay a Lender a specified amount of the interest payable on a Participating Employee's Mortgage.

(o) "Participating Employee" means an Eligible Employee who participates in the Housing Assistance Program.

(p) "Predecessor Program" means the current "XXXXXXXXXX " offered to certain Employees to assist with the purchase of a residence.

(q) "Principal Residence" means Principal Residence as that expression is defined in section 54 of the Act.

(r) "Qualified Employment" means employment with the Employer as a full-time XXXXXXXXXX

(s) "Qualified Purchaser" means an Eligible Employee, or an Eligible Employee together with the spouse or common-law partner of the Eligible Employee.

(t) "Qualified Residence" means a housing unit located in the Metropolitan Area that is a Principal Residence of the Qualified Purchaser.

(u) "XXXXXXXXXX " means the individual employed by the Employer as the XXXXXXXXXX or should such a position cease to exist shall mean the individual employed in a successor position.

Our understanding of the relevant facts, the proposed transactions and the purposes of the proposed transactions is as follows:

FACTS

1. The Employer is a corporation continued under the XXXXXXXXXX and is a "registered charity" as that expression is defined in subsection 248(1) of the Act.

2. The Employer's business number is XXXXXXXXXX .

3. The Employer has a fiscal year end of XXXXXXXXXX .

4. The Employer files information returns at the Canada Revenue Agency's Charities Directorate in Ottawa.

5. The Employer operates a XXXXXXXXXX

6. The Employer currently has approximately XXXXXXXXXX Employees, not including XXXXXXXXXX who are employed in a part-time capacity.

7. The Employer deals at Arm's Length with each Eligible Employee.

8. The Employer has had preliminary discussions with certain Financial Institutions with which it deals at Arm's Length and has received a preliminary indication that the Financial Institutions are interested in participating as Lenders in the Mortgage Interest Assistance Program.

PROPOSED TRANSACTIONS

9. The Housing Assistance Program will replace the Predecessor Program.

10. The Employer will establish the Housing Assistance Program effective XXXXXXXXXX , under which, in connection with the purchase of a Qualified Residence, each Eligible Employee will be entitled to receive a maximum of between $XXXXXXXXXX and $XXXXXXXXXX in total combined benefits under the Down Payment Assistance Program and the Mortgage Interest Assistance Program. In this regard, in respect of each Eligible Employee, the maximum benefit under the Mortgage Interest Assistance Program is $XXXXXXXXXX , the maximum benefit under the Down Payment Assistance Program is $XXXXXXXXXX , and the aggregate of the benefits under the Mortgage Interest Assistance Program and XXXXXXXXXX of the benefits under the Down Payment Assistance Program can equal but cannot exceed $XXXXXXXXXX .

11. Under the Down Payment Assistance Program:

(i) The Employer will enter into a written Loan agreement with each Participating Employee in the Down Payment Assistance Program, which agreement will confirm the total amount of the Loan as well as the terms applicable to the Loan;

(ii) The Loan agreement will specify that for each month of a Participating Employee's continued employment with the Employer after the Commencement Date, XXXXXXXXXX of the Loan will be forgiven. For this purpose, a Participating Employee who is an Employee for a minimum of XXXXXXXXXX days in a month will be considered to have been an Employee for that month. Should a Participating Employee cease to be an Employee within the XXXXXXXXXX -month period that begins on the Commencement Date, the Employee will be required to repay the Employer the outstanding balance of the Loan.

12. Under the Mortgage Interest Assistance Program:

(i) The Employer will enter into arrangements with one or more Financial Institutions to participate in this component of the Housing Assistance Program. It is anticipated that the Employer will obtain a discounted interest rate for Mortgages advanced to the Participating Employees based on the total volume and quality of business expected to be generated under the Mortgage Interest Assistance Program.

(ii) In respect of a Participating Employee, the Employer will generally provide the Lender with employment verification, employment history and possibly references.

(iii) The Participating Employee and the Lender will be parties to each particular written Mortgage agreement.

(iv) The details of each Mortgage will be described in the written Mortgage agreement including the Mortgage period (which will be at least XXXXXXXXXX years), interest rate and whether the interest rate is fixed or variable.

(v) By the terms of a written agreement between the Employer and the Lender in respect of a particular Participating Employee, the Employer will be required to make monthly payments toward the interest component of each Mortgage payment in the amount of XXXXXXXXXX of the Aggregate Interest Amount. These payments, up to a cumulative maximum of the Aggregate Interest Amount, will be paid by the Employer directly to the Lender over the XXXXXXXXXX -year period starting on the first day that payments are required to be made under the terms of the Mortgage. The Employer will make each interest payment to the Lender on or prior to the day that a payment of interest is required to be made to the Lender under the Mortgage terms.

(vi) Under the written Mortgage agreement, the Participating Employee will be required to remit the principal portion of the Mortgage payments directly to the Lender. The Participating Employee will also be responsible for all interest payments due under the Mortgage terms in excess of the Aggregate Interest Amount including, without limiting the generality of the foregoing, any monthly interest payable in excess of the Employer payment of XXXXXXXXXX of the Aggregate Interest Amount.

(vii) The written agreement between the Employer and the Lender will confirm that notwithstanding that the Employer may not have paid the Aggregate Interest Amount in full, the Employer's obligation to pay interest will terminate should a Participating Employee cease to be an Employee within the XXXXXXXXXX -month period starting on the Commencement Date. Furthermore, the Employee will be required under the Mortgage Interest Assistance Program to indemnify the Employer for any interest paid to the Lender in respect of a period subsequent to the Employee's cessation of employment.

13. Participating Employees will be required to advise the Employer in writing of the total amount they are requesting under the Housing Assistance Program and which of the component program(s) they wish to utilize. For example, a Participating Employee could request a $XXXXXXXXXX Loan under the Down Payment Assistance Program and $XXXXXXXXXX as the Aggregate Interest Amount under the Mortgage Interest Assistance Program for a total request of $XXXXXXXXXX under the Housing Assistance Program.

PURPOSES OF THE PROPOSED TRANSACTIONS

The purposes of the proposed transactions are to attract and retain Eligible Employees and to assist Participating Employees and their spouses or common-law partners in purchasing Qualified Residences.

RULINGS GIVEN:

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, Proposed Transactions and the purposes of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, our Rulings are as follows:

A. The amount of a particular Participating Employee's Loan that is forgiven by the Employer in a taxation year will be deemed by subsections 6(15) and 6(23) of the Act to be a benefit received or enjoyed in respect of, in the course of or by virtue of employment and will be required to be included in the Participating Employee's income by paragraph 6(1)(a) of the Act.

B. In respect of the amount of a Participating Employee's Loan outstanding in a taxation year, subsections 6(9), 6(23), 80.4(1) and paragraph 80.4(3)(b) of the Act will apply to include a deemed interest benefit in the income of the Participating Employee equal to the amount by which the amounts described in paragraphs 80.4(1)(a) and (b) of the Act exceed the amounts described in paragraphs 80.4(1)(c) and (d) of the Act.

C. In respect of a Mortgage under the Mortgage Interest Assistance Program, subsections 6(9), 6(23), 80.4(1) and paragraph 80.4(3)(b) of the Act will apply to include a deemed interest benefit in the income of the Participating Employee equal to the amount by which the amounts described in paragraphs 80.4(1)(a) and (b) of the Act exceed the amounts described in paragraphs 80.4(1)(c) and (d) of the Act.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .

Yours truly,

XXXXXXXXXX
Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch