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.
B. G. Dodd (613) 995-0051
June 6, 1986
Dear Sirs:
We are writing in reply to your letter of March 5, 1986 concerning the Department's January 3, 1986 news release dealing with the forgiveness of non-interest bearing employee loans used to purchase shares of the employer company.
You describe a situation involving the granting of such a loan and its proposed forgiveness and request our views on your suggested method for calculating the amount of the taxable benefit which would be required to be included in the employee's income pursuant to paragraph 6(1)(a) of the Income Tax Act. Under your proposed method, the benefit would be the amount, if any, by which the amount of the loan which is forgiven exceeds the amount by which (a) exceeds (b) where:
- (a) is the existing principal amount of the loan; and
- (b) is the fair market value of the existing loan (such value being determined by applying accepted discounting rates to the obligation to make principal repayments over the existing term of the loan).
In our view, this would not be an appropriate method for determining the amount of the taxable benefit in such cases. It is our opinion that the benefit should be determined on the basis of the present value of the residual loan balance forgiven, that is the present value of the outstanding loan balance after deducting, in this case, the proceeds of the shares to be sold for purposes of repayment.
This Branch does not deal with specific cases in which the central issue is one of valuation. Should you require an opinion on the value of the amount of the loan forgiven, full particulars should be forwarded to the local District Office (Business Equity Valuation Unit) for consideration. You should include the following documents and information with your request:
- the date of the loan agreement and the interest rate, if any;
- the date the loan agreement was to terminate originally;
- the purpose of the loan;
- the date the loan was terminated and the reason for termination;
- the amount of proceeds arising from liquidation of available security for the loan which reduced the loan balance (e.g. from shares sold or returned to the issuer);
- the amount of the residual loan balance forgiven; and
- a copy of the loan and share purchase agreement as well as any other related documentation.
We hope the foregoing will be of assistance to you.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch
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© Sa Majesté la Reine du Chef du Canada, 1986
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