7 June 1993 Administrative Letter 9303236 F - Interest Free Loans Under Dnd Disability Plan

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. Bissonnette Director Personal and General Section Source Deductions Division

Your file: 5236

Interest-free loans under a Disability Plan

The attached letter from XXXXXXXXXX dated February 1, 1993 which you referred to us concerns two matters.

In July, 1992, we were asked for an opinion on an interest-free loan granted to a disabled employee as part of a rehabilitation plan. Based on the fact situation given to us at that time, we offered the opinion that the loans in question were granted by virtue of employment and that a benefit as determined under section 80.4 of the Act should be included in a disabled employee's income. In response to the question of what should be done concerning prior years' returns, we advised that amended T4 supplementary slips should be prepared if the original slips did not contain the correct information concerning the interest benefit. The attached letter asks us to reconsider this opinion in light of new information which was submitted.

While somewhat obliquely stated,XXXXXXXXXX would also like to know whether the Department will insist upon amended T4 supplementary slips for prior years in the event that the loans do give rise to a benefit under section 80.4 of the Act. He points to the fact that the employer wishes to avoid a negative financial impact to the employees who received these loans prior to 1993.

With respect to the first issue, we have reviewed the additional information and documentation submitted (copies of which are attached) concerning Service Income Security Insurance Plan/ Régime D'Assurance Revenu Militaire (SISIP/RARM), the long term disability plan of the Canadian military. For the reasons stated in our original letter of October 1, 1992, it is still our opinion that the loans in question are received by virtue of employment.

The essential issue is whether the disabled claimants have a right to the loans under the policy 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 a right to the loans by virtue of the policy. If a disabled employee is receiving benefits under the plan, the insurer may, with the written approval of the policyholder, grant the employee a loan which will be funded out of the amounts available for an experience refund. Exhibit 3 of XXXXXXXXXX's May 11, 1993 submission states that the experience refund is calculated, in part, on the expenses of the plan which include the net amount related to the rehabilitation loans. In addition, clause 5.01-IV.4 of the Experience Rating Agreement states that the employer, as policyholder, "is responsible for all direct expenses incurred in rehabilitation, including any unpaid loans ... ".

XXXXXXXXXX also states that it is the trustees of the plan, not the employer, who is involved in the granting of the loan. Clause 5.01-II.2(c) of the Experience Rating Agreement states that the loans will only be granted upon receipt of written authorization from the policyholder. While we asked for a copy of the policy to confirm that the employer was in fact the policyholder, we only received a partial copy; however, from the context of the documentation received it seems clear that the employer is in fact the policyholder. Furthermore, the Terms of Reference for the trustees makes it clear that while the trustees have a duty to provide advice with respect to the administration of the plan, the Assistant Deputy Minister (Personnel) has the sole authority with respect to the plan.

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 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. A copy of our reply to XXXXXXXXXX is attached.

As the issue of whether amended T4 supplementary slips will be required is an administrative issue, we ask you to respond to XXXXXXXXXX remaining question.

B.W. Dath DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch