7 June 1993 External T.I. 9303235 F - Interest Free Loans for Rehabilitation of Disabled Employee

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Interest Free Loans to Disabled Claimants under a Wage Loss Replacement Plan

Your letter of February 1, 1993 addressed to Paul Rémillard of our Source Deductions Division was referred to us for our comments in light of the information submitted with respect to the Service Income Security Insurance Plan/ Régime D'Assurance Revenu Militaire (SISIP/RARM), the long-term disability plan of the Canadian military.

On October 1, 1992 we provided you with general comments concerning the taxability of interest-free loans granted to disabled claimants under a rehabilitation program administered by an employer's wage loss replacement plan. Based on the facts given in your example of such a situation, we advised that subsection 80.4(1) of the Income Tax Act (the Act) would apply to deem an employee to have received a taxable benefit from such a loan. You have now provided information concerning an actual plan (SISIP/RARM) which you indicate differs from the facts given in your previous example.

It is your view that an interest-free loan granted under the rehabilitation program administered by SISIP/RARM does not give rise to a taxable benefit to the disabled employee. In support of this position, you state that it is the wage loss replacement plan and not the employer which provides the funding for the loans and that the employer is not involved in the approval process for the loan. You also indicate the loans are granted in accordance with the guidelines contained in a supplemental agreement with the employer and the insurer. You provided excerpts from the policy covering the plan, the supplementary agreement between the employer and the insurer concerning experience rating agreement for the plan and the terms of reference for the trustees of the plan.

In our view, the essential issue is whether the disabled claimants have a right to the loans under the policy (or plan) or whether the loan is granted by virtue of employment. Our review of the documentation submitted to date indicates that the employees do not have any rights to the loans by virtue of either the policy or the plan. As stated in clause 5.01-II.2(c) of the Experience Rating Agreement, where a disabled employee is receiving benefits under the plan the insurer may, with the written approval of the policyholder, grant the employee a loan.

While you state that the employer is not involved in the granting of the loan, it is our understanding that the employer is the policyholder who is required to provide the written authorization. In this regard, we note that clause 10 of the Terms of Reference document states that the duties of the trustees are advisory in nature only and that the Assistant Deputy Minister (Personnel) has the authority to enact plan decisions on behalf of the employer.

Accordingly, it is our view that loans granted under the rehabilitation program administered by the insurer of SISIP/RARM are loans granted by virtue of employment and that, to the extent that the rate of interest on those loans is less than the prescribed rate, a benefit under subsection 80.4(1) of the Act is required to be included in the employee's income.

We have referred your question concerning the need to amend prior year T4 supplementary slips to our Source Deductions Division.

We trust our comments will be of assistance to you.

Yours truly,

P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

c.c.      Paul Rémillard, Source Deductions Division