10 July 1986 Income Tax Severed Letter 5-1580 - [860710]

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.

D.Y. Dalphy (613) 957-2134

Dear XXXX

This is in reply to your letters of December 4, 1985 and May 9, 1986 regarding situations where employees received interest-free or low- interest loans to assist in the purchase of homes upon their relocation and the employer is now considering whether to forgive the debts or to seek foreclosure orders.

We confirm that our position regarding the income tax consequences of the forgiveness of such loans by the employer is that which is set out in our letter of October 18, 1985 to your firm; that is, both the cash payment and the amount forgiven would be included in the employees' income as a taxable benefit pursuant to paragraph 6(1)(a) of the Income Tax Act (the "Act"). In our, view, the situation described in your letter of December 4, 1985 is not analogous to the Ransom case, for in Ransom the taxpayer incurred a loss in the course of moving to a new location to carry on performing the duties of his employment for the same employer. Further, the comments of Mr. (now Chief) Justice Dickson in R. v. Savage, 83 DTC 5409 (S.C.C.) (at p. 5414), which give a broader meaning to the words used in paragraph 6(1)(a) of the Act, are significant:

"With great respect, however, I do not agree with the latter part of the passage last quoted and in particular the statement that, to be received in the capacity of employee, the payment must partake of the character of remuneration for services. Such was the conclusion in the English cases but based on much narrower language. Our Act contains the stipulation, not found in the English statutes referred to, 'benefits of any kind whatever... in respect of, in the course of, or by virtue of an office or employment'. The meaning 'benefit of whatever kind' is clearly quite broad; in the present case the cash payment of $300 easily falls within the category of 'benefit'. Further, our Act speaks of a benefit 'in respect of' an office or employment. In Nowegijick v. The Queen, 83 DTC 5041 this Court said, at p. 5045, that:

'The words "in respect of" are in my opinion, words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters."'

"I agree with what was said by Evans J.A. in R. v. Poynton., [1972] 3.O.R. 727 at p. 738, ( 72 DTC 6329 at pp. 6335-6), speaking of benefits received or enjoyed in respect of, in the course of, or by virtue of an office or employment:

'I do not believe the language to be restricted to benefits that are related to the office or employment in the sense that they represent a form of remuneration for services rendered. If it is a material acquisition which confers an economic benefit on the taxpayer and does not constitute an exemption, e.g., loan or gift, then it is within the all embracing definition of s. 3.'"

Regarding the matter of forgiveness, although section 80 of the Act would not apply in this situation because the debt would fall within the exception set out in paragraph 80(1)(d) of the Act, paragraph 6 of Interpretation bulletin IT-2938 may be referred to in order to determine if forgiveness has taken place. Forgiveness does not take place if the employer unilaterally merely abandons his right to enforce payment or writes the loan. off his books if the mortgage remains enforceable (although section 80.4 of the Act may apply) - to forgive the outstanding balance of the employees' mortgages, the employer must settle or extinguish the mortgage, e.g., by discharging it. The term "extinguish" means the final extinguishment of the debt by any legal means (i.e., by payment, by cancellation, by set-off, by novation, by a release, etc.).

In our opinion, where a debt to an employer is extinguished by operation of law, even where the employer would otherwise have forgiven the debt, a benefit to the employee would not arise under paragraph 6(1)(a) of the Act (although Section 79 of the Act could apply). However, if the employer has additional recourse against the employee after repossession (e.g., a personal covenant of the mortgagor), the amount forgiven would be a taxable benefit pursuant to paragraph 6(1)(a) of the Act.

We wish to indicate that these comments constitute an opinion, not an advance income tax ruling and as such they are not binding on the Department. We hope these comments will assist you.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR P. D. FUOCO for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch