4 January 1989 Income Tax Severed Letter 5-6576 - [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.

A.B. Adler (613) 957-8962

JAN 4 1989

Dear Sirs:

Re: Section 80.4 of the Act

We are replying to your letter dated September 13, 1988, wherein you requested our views as to when a loan is considered to be received by virtue of office or employment. In our conversations (Humenuk XXXX) of September 21, 1988, and November 2, 1988, you asked whether an interest subsidy on a loan, whether paid to the employee or to the lender, would be taxable under paragraph 6(1)(a) or subsection 6(9) of the Income Tax Act (the "Act").

While there is no question that a loan advanced by the employer to an employee would be received by virtue of employment, it is not so self-evident in the case of a third party loan. It is the Department's position that a third party loan could be considered to be received by virtue of employment if the employer is directly involved with the initial granting of the loan. Four out of five of the situations set out in your letter are indications that the employer was so involved, namely:

1) the employer was involved in the negotiation of the loan with the lender;

2) the employer guarantees the loan;

3) the employer recommends to the lender in writing that the loan be made to the employee;

4) the employer provides a letter of introduction to the lender explaining the amount and terms of the mortgage interest subsidy which the employer has agreed to pay to the employee.

The fifth situation which the Department has accepted as an indication that the employer was involved with the granting of the loan is the situation where there is a written agreement before the loan is made in which the employer agrees to reimburse the lender for all or part of the interest on the loan. If the agreement is not in writing, the Department is not prepared to accept the fact that the employer was involved in the initial granting of the loan and therefore the interest subsidy would be taxable under paragraph 6(1)(a) rather than subsection 6(9) as determined under subsection 80.4(1) of the Act. It should be noted that this distinction is not dependent on the purpose of the loan or on whether the loan is granted to the employee, the employee's spouse, or both.

The determination of whether a particular loan was received by virtue of employment will also affect a "home relocation loan" as defined in subsection 248(1) of the Act in that a loan which is not received in the circumstances described in subsection 80.4(1) of the Act will not be a "home relocation loan". However, it is our understanding that your questions do not relate to "home relocation loans" but rather to "home purchase loans" as defined in paragraph 80.4(7)(a) of the Act.

In our conversation of September 22, 1988, your [sic] asked whether an employee's existing mortgage could be treated as a "home purchase loan". You are considering the situation where the employer has agreed to an interest subsidy by means of one or more of the five situations noted above and based on this agreement, the employee intends to renew his present loan at the specified renewal time rather than acquire a new loan to repay the existing loan. If the facts show that the renewal is a normal renegotiation of the mortgage at the end of its term (i.e. new terms, subject to current interest rates and lender's current terms and conditions, any portion of the previous balance could be paid down, etc.), it is our position that such a renewal will be considered a new loan for the purposes of section 80.4 of the Act.

Assuming that the employer was involved in granting the new loan to the employee, any interest subsidy agreed to by the employer in respect of that loan, would be taxable under subsection 6(9) as determined under subsection 80.4(1) of the Act. If the new loan is granted by virtue of employment and the loan otherwise qualifies under paragraph 80.4(7)(a), the loan would be a "home purchase loan".

We trust our comments will be of assistance to you.

Yours truly,

ORIGINAL SIGNED BY

P.D. Fuoco

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