25 January 1990 Income Tax Severed Letter 594348 - Employee Loans - Subsidized Mortgages

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.

19(1)                                             5-9348
                                                  J.D. Jones
                                                  (613) 957-2104

JAN 25 1990

Dear Sirs:

Re: Subsidized Mortgages Section 80.4 of the Income Tax Act (the "Act")

This is in reply to your letter of December 21, l989 wherein you requested our confirmation of your understanding of the calculation of the benefit deemed to have been received by employees pursuant to section 80 4 of the Act in the following situations.

Two taxpayers, both  employed by different employers, enter
jointly into a mortgage with    24(1)     Each employer operates
a subsidized mortgage program administered by    24(1)   Each
employer has an agreement with     24(1) which we are assuming
satisfies the provisions of section 80.4 of the Act such that the
employees will receive the loan by virtue of their office or
employment.  It is also assumed that the employees apply jointly
for the mortgage in a manner which satisfies section 80.4 of the
Act.

Each employer provides a 1% interest subsidy on the full mortgage ($100,000). The rate of interest prescribed by Regulation 4300 at the time the loan was granted is 11% and the contract mortgage interest rate is 12%. The contract mortgage interest rate is the "regular" mortgage interest rate charged to non-subsidized mortgages.

Example #1

You propose to calculate the taxable benefit pursuant to section 80.4 of the Act for each of the two taxpayers as follows:

(i)       (Prescribed + (Subsidy - (Total of Actual = Total
          Taxable         Interest)   Interest)       Interest
          Paid by     Benefit Both Employer and Employee)

          11% + (1% + 1%) - 12% = 1%

(ii)      The net taxable benefit is 1% for the two employees
          combined.

(iii)     Since each employer contributed an equal amount of
          subsidy, the combined taxable benefit of 1% will be
          split proportionately. That is, taxpayer A will claim
          .5% and taxpayer A will also claim .5%.

Example #2

In the event that the two employers contribute different amounts of subsidy (e.g. Employer A contributes 1% and Employer B contributes 2%), the following calculations, in your view, will apply:

(i)       (Prescribed +  (Subsidy - (Total of Actual = Total
          Taxable          Interest)    Interest)      Interest
          Paid by Benefit   Both Employer and Employee)

          11% + (1% + 2%) - 12% = 2%

(ii)      The net taxable benefit is 2% for the two employees
          combined.

(iii)     However, since each employer contributed an unequal
          amount of subsidy the total taxable benefit will be
          prorated in the following manner:

          a)   Employer A share of total subsidy 1/3

          b)   Employer B share of total subsidy 2/3

          c)   Therefore, in your view, the employee of Employer
               A will include in income a benefit of 1/3 of 2% . 
               The employee of employer B will include in income
               a benefit of 2/3 of 2%.

Our Comments

As stated in Interpretation Bulletin IT-42 lR, subsection 80.4(I) of the Act deems a benefit, in the above two examples, to have been received by an individual if, by virtue of the present office or employment of that individual any person receives a loan or otherwise incurs a debt. The benefit is the amount by which the aggregate of interest for the year on the loan or debt calculated at a prescribed rate plus any interest paid or payable thereon by the individual's employer or a person related thereto exceeds all interest for the year paid on such loans or debts not later than 30 days after the end of the year. Accordingly, it is our view that the calculation of the benefit pursuant to section 80.4 of the Act in the above two examples would be as follows:

Example #1

Paragraph 80.4(1)(a):  11%
          80.4(1)(b):   1%
          80.4(1)(c):  12%
          80.4(1)(d):  nil

Then (a) + (b) - (c) - (d) = 12% - 12% = nil

Accordingly, each of the two taxpayers in this example would not be assessed a taxable benefit as the above calculation would apply equally to each of them (provided the two employers are not related to each other.)

Example #2

Employee of Employer A

Paragraph 80.4(1)(a):  11%
          80.4(1)(b):   1%
          80.4(1)(c):  12%
          80.4(1)(d):  nil

Then (a) + (b) - (c) - (d) = 12% - 12% = nil

Employee of Employer B

Paragraph 80.4(1)(a):  11%
          80.4(1)(b):   2%
          80.4(1)(c):  12%
          80.4(I)(d):  nil

Then (a) + (b) - (c) - (d) = 13% - 12% = 1%

Accordingly, the employee of Employer A is not assessed a taxable benefit while the employee of Employer 8 will be assessed a taxable benefit based on 1% provided the two employers are not related to each other.

We trust our comments will be of assistance to you.

Yours truly,

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