25 November 1993 Income Tax Severed Letter 9323577 - Interest Costs on Bridge Financing upon Relocation

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                    November 25, 1993

  Mississauga District Office       Personal and General
  Client Assistance                  Section
                                    D. Zion
                                    (613) 957-2140
  Attention: Robert Armstrong

                                    932357

Interest Costs on Bridge Financing

This is in reply to your memorandum of August 11, 1993 and your previous telephone conversation regarding the same topic with A. Humenuk on June 25, 1993. We apologize for the delay in responding.

In your memorandum you have furnished further details of a bridge financing arrangement between an employee and employer upon the pending relocation of the employee. You have requested our opinion as to whether "all reasonable efforts" have been made to sell the employee's previous residence. If this is the case, under the Department's current policy the employee would not be subject to a taxable benefit for the interest costs. The facts as we understand them are:

                    XXXXXXXXXX

Our Comments

The documentation submitted has been reviewed and we are of the opinion that the first issue to be addressed is whether or not the executive is a shareholder of the company. The total amount of funds advanced to the date of your enquiry total $XXXXXXXXXX Few companies advance these sums of money by virtue of an individual's employment, more often it is by virtue of one's shareholdings. It is not possible to comment more specifically on this issue based on the information provided. A review of other documentation such as the employment contract, shareholder agreement (if applicable), the corporate minutes, company policy instructions and any other relevant factors would be in order. If you find that the executive is a shareholder of the company, whether or not he received the bridge financing in his capacity as a shareholder or an employee is a question of fact, to be determined after a review of all pertinent information.

If the executive is a shareholder then you should satisfy yourself that the loan falls within the exceptions of subsection 15(2) of the Income Tax Act (the Act). If the loan does not fall within one of these exceptions, more specifically in this case, subparagraph 15(2)(a)(ii) of the Act, it is possible that, given the details you have provided, paragraph 15(2)(b) of the Act could be applicable as in all probability the loan will be repaid within one year. Previously, it was the Department's position that if the shareholder received a loan by virtue of his employment and not by virtue of his shareholdings it was the Department's position that subsection 15(2) did not apply.

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If the executive is a shareholder of the company and received the loan by virtue of his shareholdings, then subsection 80.4(2) of the Act regarding the interest benefit would be applicable and not subsection 80.4(1). The loan would not qualify as a home relocation loan as defined under subsection 248(1) of the Act as, to meet that definition, it must be received by virtue of one's employment. The Department's position with respect to relief from a taxable benefit for bridge financing only extends to home relocation loans which by definition are received by virtue of employment, not shareholdings. Thus, the prescribed rate to be applied for the period is the prescribed rate in effect for that period of time. Neither subsection 80.4(4) nor 80.4(6) of the Act which deal with interest applicable to home relocation loans and deemed new home relocation loans would apply here.

If the individual was a shareholder and employee of a company, and a review of all the facts of the case indicate that the individual did indeed receive the loan in question by virtue of his employment, then it is the Department's position that he would then fall under the auspices of subsection 80.4(1) of the Act and the loan would be considered a home relocation loan under subsection 248(1) of the Act.

If the executive is not a shareholder or is a shareholder/employee who received the loan by virtue of his employment, then there are other factors to consider which the provided documentation does not assist in resolving. You would wish to obtain some type of documentation which would enable you to resolve the following questions. What was the payment time frame for deposits on the new home? Generally, where an individual obtains a loan in the ordinary course of business which involves the acquisition of a vacant lot and the construction of a dwelling thereon, the loan would normally be provided to the individual in instalments as costs, with respect to the dwelling are incurred. In this executive's case most of the funds were forwarded in one lump sum, very early in the process. Are you satisfied that the bridge financing was used for no other purpose than to construct the home in the new work location?

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What is the usual time frame for the sale of this type of home in the current market? If it normally took 3 to 5 months to receive a reasonable offer on a house of this value, then the early efforts to list the house would appear to be reasonable under the circumstances and the early offer, exceptional under the circumstances.

We trust that our comments have been of assistance.

Paul Fuoco Section Chief Personal and General Section Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. André Bissonnette Director Source Deductions Division