15 April 1988 Income Tax Severed Letter 5-5605 - [Home Purchase Loans; Section 80.4]

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.

N.R. Mitchell (613) 957-2134

APR 15 1988

Dear Sirs:

Re: Home Purchase Loans; Section 80.4 of the Income Tax Act (the "Act")

This is in reply to your letter of February is, 1988, concerning the intentions of your company to offer reduced rate residential mortgages to employees under a "cafeteria style" benefits plan.

We understand that the company has in the past provided residential mortgagee to staff members where the property satisfied certain criteria. Various fees involved in establishing the mortgage were waived for employees, but the employee was required to pay the full market rate of interest.

Under the proposed new benefit plan, the company will offer reduced rate residential mortgages to employees. We would agree with your conclusion that such mortgages would be received "by virtue of the office or employment" and the benefit from the low interest rate would be calculated in accordance with subsection 80.4(1) and included in income under subsection 6(9) of the Act. On the assumption that these loans qualified as "home purchase loans" or "home relocation loans", subsection 80.4(4) of the Act would apply, with the result that a taxable benefit to the employee would result only to the extent that the rate of interest paid by the employee is less than the rate of interest prescribed by the Act at the time the loan was received. Subsection 80.4(6) of the Ace would deem such a loan to be renewed every five years.

Your principal inquiry concerns the appropriate treatment of those employees who currently have mortgages with the company. These mortgages are not due to be renegotiated for some time after the commencement of the new benefit plan in January 1989. Under the plan, it is not intended to register the reduced interest rate on the mortgage document itself. Rather, a separate agreement will be entered into with the employee under which the reduced interest payable will be specified based on the allocation of certain amounts which are available for this purpose under the "cafeteria style" benefits plan. If such a side agreement with respect to the interest payable is entered into by those individuals who already have mortgages outstanding, you ask if this would be sufficient to bring that loan and any resultant benefit within subsection 80.4(1) of the Act and also if the five-year ceiling on the deemed benefit pursuant to subsection 80.4(4) of the Act would be available.

We would comment at the outset that the capacity in which an individual receives a loan or other benefit is a question of fact which can only be determined on a case-by-case basis in light of all of the surrounding facts and circumstances. Furthermore, subsection 80.4(1) of the Act refers to situations in which "a person or partnership received a loan or otherwise incurred a debt by virtue of the office or employment ...". It is the capacity in which the individual received the loan at the time it was made that determines whether or not it comes within section 80.4 of the Act. A subsidy, reimbursement or other arrangement by the employer with respect to the interest payable on the loan could not operate with retroactive effect. In other words, such a subsidy could not transform a loan or mortgage already received into a loan received by virtue of one's office or employment if that would not otherwise be the case.

With respect to the situation outlined in your letter, we understand that the existing loans or mortgages in question were extended directly to the employees by their employer (rather than from a third party lender). While the interest rate applicable to these loans was not less than the prevailing market rate, certain special benefits were extended in conjunction with these loans, in particular, the waiver of renewal fees and other unspecified charges. Under these circumstances, we are of the view that such loans could be considered to be received by virtue of the office or employment and would therefore be subject to subsection 80.4(1) of the Act. So long as the effective rate of interest paid by the employee was no less than the applicable prescribed rate, the calculation in subsection 80.4(1) of the Act would not result in any benefit that would be subject to tax. That situation would, presumably, be changed with the entering into the new agreement with respect to the effective interest rate. Moreover, on the assumption that all of the other applicable requirements could be met, these existing loans would also appear to qualify for the purposes of subsection 80.4(4) of the Act. On the other hand, it is our view that any waivers of renewal fees or other charges that would normally be charged to a borrower by the lending institution would be taxable benefits to the employees pursuant to paragraph 6(1)(a) of the Act.

The foregoing represents our considered opinion concerning the issues raised in your inquiry, but this is not a ruling and is not binding upon the Department.

Yours truly,

ORIGINAL SIGNED BY

ROBERT H. JOYCE for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch