25 May 1989 Income Tax Severed Letter 5-7921 - [Sections 6 and 80.4 of the Income Tax Act]

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.

J. D. Jones (613) 957-2104

MAY 25 1989

Dear Sirs:

Re: sections 6 and 80.4 of the Income Tax Act (the "Act").

This is in reply to your letter of April 19, 1989, wherein you requested our, opinion on the application of sections 6 and 80.4 of the Act to a Group Mortgage Plan arranged by an employer.

It is our understanding that the type of plan being contemplated will operate as follows:

The employer will negotiate an employee mortgage plan with an appropriate financial institution. Pursuant to this plan, qualified employees will be able to obtain from the financial institution a loan secured by a mortgage at current market rates. The employer will subsidize the employee's interest costs by paying directly to the financial institution a portion of the interest costs. An employee qualifies for the subsidy only if he or she has relocated at the request of the company to an area where housing prices are higher than at the employee's former location. The employer makes its portion of the interest payment directly to the financial institution.

You have provided the following example to illustrate your understanding of how section 80.4 of the Act applies.

An employee obtains a mortgage at 12 percent and the employer pays directly to the financial institution 3 percent with the employee paying the remaining 9 percent. The loan amount is $100,000 and the prescribed rate of interest throughout the period is ten percent.

It is your understanding that section 80.4 of the Act would result in the following benefit being included in a taxpayer's income from employment:

Loan X Prescribed Rate ($100,000 X 10%) $10,000

Interest Paid by Employer ($100,000 X 3%) 3,000

Subtotal $13,000

Amounts Paid on the Loan in the Year 12,000 ($100,000 X 9% + $100,000 X 3%)

Section 80.4 Benefit $1,000

It is your understanding that although the employee in the above example would receive a $3,000 benefit from the employer, the taxable benefit pursuant to section 80.4 of the Act would be $1,000.

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. Nevertheless, based upon the situation described above, it is our view that it appears that the employee has received a loan or otherwise incurred a debt by virtue of the office or employment within the meaning of section 80.4 of the Act. Accordingly, we agree with your understanding that the employee, in the above example, has received a benefit in the year in the amount of $1,000 pursuant to section 80.4 of the Act. We also agree with your view that, in the above example, the only taxable benefit imputed to the employee will be that calculated pursuant to section 80.4 of the Act and that no further amounts would be included in the employee's income under section 6 of the Act.

We trust our comments will be of assistance to 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