22 August 1994 Internal T.I. 9411346 - BRIDGE FINANCING ON RELOCATION OF 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.

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.

Principal Issues:

reimbursement of interest paid on bridge financing arising from an employee's relocation

Position TAKEN:

question of fact

Reasons FOR POSITION TAKEN:

not enough information given

		August 22, 1994

	André Bissonnette	Rulings Directorate
	Director 	A. Humenuk
	Source Deductions Division	957-8953
	Attention: Susan Sinclair
		941134
	Bridge Financing on Relocation of an Employee

This is in response to your request for assistance in responding to a memorandum from XXXXXXXXXX District Office dated April 15, 1994 concerning the subject. We regret the delay in responding.

In the comments that follow, unless otherwise stated, all statute references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended, consolidated to June 10, 1993 (the "Act").

The district office is dealing with a situation where an employer has relocated an employee from XXXXXXXXXX The employer reimbursed the employee $XXXXXXXXXX in 1993 on account of amounts expended in relation to the move and included such amount on the employee's T4 information slip as a taxable benefit. The employer has asked for clarification as to whether this is correct. Our understanding of the facts is as follows:

The employee moved from XXXXXXXXXX in September 1993 as a result of a job offer in XXXXXXXXXX

The employer agreed to reimburse the employee upon the submission of receipts for various moving expenses incurred up to a maximum of $10,000.

The employee listed the former home for sale in August 1993 and purchased a residence in XXXXXXXXXX at about the same time.

An excerpt from a letter from the employer to the employee confirms the employer's understanding that the employee had listed his home at the then current market price and that it was his intent to sell it as soon as possible.

The financing of the new residence included a collateral loan on the former residence and a first mortgage on the new residence.

The $XXXXXXXXXX reimbursed by the employer in 1993 includes $XXXXXXXXXX for legal costs supported by invoices\receipts, $XXXXXXXXXX for interest paid on the collateral loan on his former residence, the proceeds of which were used as a downpayment on the new residence and $XXXXXXXXXX in respect of the first mortgage held on the new residence.

From the sample letter from the bank, used to substantiate the reimbursements related to the bridge financing, the monthly payments made to the bank on October 22 and November 1, 1993 were as follows:

Oct 22: interest only on the collateral loan $ XXXXXXXXXX
Nov 1 : principal, interest and taxes on
first mortgage XXXXXXXXXX
Nov 1 : premium in respect of life insurance XXXXXXXXXX
$XXXXXXXXXX

The District Office has asked whether the reimbursement of $XXXXXXXXXX (for the interest on the collateral loan and the payments in respect of the first mortgage) is deductible by the employee as a moving expense or alternatively whether it can be considered a non-taxable reimbursement described in paragraphs 35 -38 of Interpretation Bulletin IT-470R "Employees' Fringe Benefits".

The cost of maintaining a second residence is not deductible by the employee under section 62 of the Act and any reimbursement for such costs would ordinarily be considered a taxable benefit. However, the rationale for excluding the reimbursement of employment-related relocation costs from an employee's income is that the employee is not considered to receive an economic benefit from such a reimbursement. While the types of expenses which qualify are not necessarily limited to those which would otherwise qualify as moving expenses under section 62 of the Act, it is our view that the reimbursement of capital expenditures or the increased cost of living at the new residence would not qualify for the tax-exempt treatment described in the bulletin.

Consequently, the reimbursement of payments on account of principal, taxes and life insurance premiums related to the first mortgage would constitute a taxable benefit to the employee. Likewise, if any portion of the reimbursement in respect of the collateral loan included principal, it would also be included in income.

The term "bridge financing" refers to a loan used to bridge the gap during which the employee bears the financing costs of the former residence as well as that of the new residence. In order to determine whether the interest payable on a particular loan qualifies for the bridge financing treatment described in TOM 3642 and 3696, we need to ascertain the amount of the loan, the purchase price of the new residence and the fair market value of the former residence. It is our understanding, based on a July 22, 1991 memorandum from T.D. Peters, then of your Division (copy of which is attached), that the comments in TOM 3642 and 3696 on interim or bridge financing are restricted to a loan which does not exceed the value of the former home. A loan to finance the balance of the purchase price of the new residence will not be considered bridge financing even though the employee has two residences at the same time.

To the extent that the reimbursement is in respect of interest on an amount not exceeding the value of the former home and the employee used all reasonable efforts to sell his home, it is our opinion that the reimbursement by the employer of the interest paid on a bridge financing loan obtained by the employee would not be a taxable benefit to the employee. In the present case, we have no information, other than the fact that the property was subsequently taken off the market and rented, as to whether the employee used all reasonable efforts to sell his home in XXXXXXXXXX during the period in which the employer provided assistance. Some factors to be considered include whether the employee has used the services of a real estate agent, the listed price of the property compared to that of similar properties offered for sale in the area and the market conditions for real estate during that time. The fact that the employee eventually chose to rent the property may be a reflection of market conditions so poor that the property could not be sold at any price. On the other hand, the rental of the property may be an indication of the taxpayer's original intent.

The recent case of Splane v the Queen (90 DTC 6442) as confirmed by the Federal Court of Appeal (92 DTC 6021) may be of assistance in determining whether any portion of the reimbursement of interest on a loan which is not considered bridge financing should be included in income. However, for greater certainty, the reimbursement of principal, taxes and life insurance premiums on the first mortgage would not qualify for the non-taxable treatment described in your Division's TOM 3642.

If you require additional assistance on a particular facet of the District Office's review of this situation, please provide the details of your concern as well as your analysis and we will consider the matter in further detail.

B.W. Dath
Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch