15 February 1994 External T.I. 9330465 F - Mortgage Interest Subsidies

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Mortgage Interest Subsidies

This is in reply to your letter of October 20, 1993 in which you requested our comments on the tax consequences in respect of loans made under a mortgage interest subsidy program. We apologize for the delay in responding.

You have enclosed sample documentation of the type which, as indicated to us in a telephone conversation on December 10, 1993 (Eisner/XXXXXXXXXX), has been executed between the XXXXXXXXXX and employer companies. Pursuant to the documentation, mortgage interest subsidies will be provided by an employer in respect of loans made by the XXXXXXXXXX to employees of the employer. Your concern is whether the benefits in respect of the loans are to be determined under subsection 80.4(1) of the Income Tax Act (the Act).

With respect to the above issue, it is not possible to provide comments on the basis of the documentation provided to us. In order to make such a determination, it would be necessary to review all the relevant documentation which would include information with respect to the mortgage subsidy plan established by the employer for its employees.

Such a determination must also be made in respect of each employee.

As a further comment, we are mentioning that the review of completed transactions is a matter that falls within the responsibility of your local District Taxation Office. Accordingly, if you have an actual situation with which you are concerned, the relevant facts and details should be submitted to the XXXXXXXXXX District Office. We are, however, providing you with the following general comments.

Our Comments:

The tax treatment in respect of a third party subsidized loan (i.e., the interest in respect of the loan is subsidized by the employer) made to an employee/shareholder in his or her capacity as a shareholder is considerably different from the tax treatment in respect of such a loan made to an employee/shareholder in his or her capacity as an employee.

Of course, the issue of whether a third party loan has been made by virtue of an employee/shareholder's employment or shareholdings involves a question of fact.

Where the loan has been made to an employee/shareholder in his or her capacity as a shareholder, subsection 80.4(1) of the Act would not be applicable as the loan was not made by virtue of the individual's employment. In addition, subsection 80.4(2) of the Act would generally not be regarded as being applicable on the basis that the loan is not described within that provision (i.e., the loan was not received from the employer corporation or a corporation related thereto). As a consequence, the amount of the related subsidy paid by the employer corporation would be included in the individual's income under subsection 15(1) of the Act. In addition, the employer corporation would not be entitled to deduct the amount of the subsidy as it would not be considered to be an expense incurred for the purposes of gaining or producing income for the purposes of paragraph 18(1)(a) of the Act.

It is also our view that where an employee who is not a shareholder, received such a loan by virtue of an employee/shareholder's shareholdings, the amount of the subsidy would be included in the employee/shareholder's income under subsection 15(1) of the Act.

For the tax consequences in respect of a loan that involves an individual who is an employee, we refer you to Interpretation Bulletin IT-421R2 "Benefits to Individuals, Corporations and Shareholders from Loans or Debt". We are also mentioning that, in particular, comments on third party loans have been included in paragraph 4.

As indicated above, the issue of whether or not a loan made by a corporation to an individual could be considered to be received by the individual in his or her capacity as an employee or as a shareholder involves a finding of fact in each particular case. However, it is the Department's general position that where a third party subsidized loan has been made to a employee/shareholder of a public corporation in his or her capacity as an employee rather than as a shareholder and the subsidy is provided on the same terms and conditions as subsidies provided to other employees who are not shareholders, the loan would be considered to be a loan to an employee rather than a shareholder.

However, the situation could be different where the individuals are shareholders in a private corporation. As a further comment, it is the Department's view that where a particular benefit is available only to shareholders, there is a presumption that the benefit is made to a particular individual in his or her capacity as a shareholder.

These comments represent our opinions of the law as it applies generally. As indicated in paragraph 21 of Information 70-6R2, these opinions are not binding on the Department.

We trust that our comments will be of assistance to you.

Yours truly,

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