22 April 1988 Income Tax Severed Letter 5-5675 - [Home Purchase Loans and Home Relocation Loans; Subsection 80.4(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 22 1988

Dear Sirs:

Re: Home Purchase Loans and Home Relocation Loans; Subsection 80.4(4) of the Income Tax Act (the "Act")

This is in reply to your letter of March 2, 1988, concerning the calculation of the taxable benefit with respect to loans to which subsection 80.4(4) of the Act is applicable. As explained in paragraph 14 of Interpretation Bulletin IT-421R , subsection 80.4(4) of the Act puts a ceiling on the taxable benefit derived from certain low-interest loans by providing that the interest benefit to the employee shall not exceed the amount of interest that would be determined based on the prescribed rate in effect at the time the loan was received.

You are concerned about the application of subsections 80.4(1) and 80.4(4) of the Act in situations where the prescribed rate of interest fluctuates greatly within a given year. By way of illustration, you have asked us to consider the following example.

Facts

1) A home purchase loan of $100,000 was received on January 1, 1986.

2) The outstanding principal throughout 1988 will be $100,000.

3) The prescribed rate at the time the loan was received was 9%.

4) Assume that the prescribed rates in 1988 will be:

Quarter 1 - 9% Quarter 2 - 10% Quarter 3 - 7% Quarter 4 - 12%

Paragraph 14 of IT-421R seems to imply that subsection 80.4(4) be applied to limit the amount of interest computed under paragraph 80.4(1)(a) in the following manner. The amount of interest under that paragraph will be the lesser of:

a) $100,000 x (9% + 10% + 7% + 12%) = $9,500, and 
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b) $100,000 x (9% + 9% + 7% + 9%) =  $8,500
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The other method of calculating the limit would be as follows. The amount of interest under 80.4(1)(a), as limited by subsection 80.4(4), will be the lesser of:

a) $100,000 x (9% + 10% + 7% +12%) = $9,500, and
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b) $100,000 x (9%) = $9,000

You ask which method of computing the interest limit in subsection 80.4(4) is correct.

In our view, the first method of calculating the interest would be correct. Paragraph 80.4(1)(a) of the Act requires one to calculate "all interest on all such loans and debts computed at the prescribed rate on each such loan and debt for the period in the year during which it was outstanding". The interest rate so computed will follow both upward and downward fluctuations in the quarterly settings of the prescribed rate. Where subsection 80.4(4) of the Act applies, it is our view that it negates only the upward fluctuations in the prescribed rate which take that rate over the level in effect at the time the home purchase loan or home relocation loan was received.

We trust this information will be of assistance.

Yours truly,

ORIGINAL SIGNED BY

ROBERT H. JOYCE

for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch