7 November 1994 External T.I. 9416935 - EMPLOYEE LOAN - INCOME INCLUSIONS

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:

Employee loan, deemed interest benefit and subsequent forgiveness of the loan and the accrued interest.

Position TAKEN:

- Deemed interest benefit computed pursuant to 80.4(1) and included in income by virtue of 6(1)(a)
- Portion of loan forgiven included in income under 6(1)(a) pursuant to 6(15)
- Accrued interest forgiven included by virtue of same sections as portion of loan forgiven
- Subsection 4(4) will operate to exclude that portion of accrued interest forgiven which has already been included in income in previous years

Reasons FOR POSITION TAKEN:

Legislation, technical notes for amendment to subsection 4(4)

		941693
XXXXXXXXXX	D. Zion

Attention: XXXXXXXXXX

November 7, 1994

Dear Sirs:

Re: Employee Loan - Income Inclusions

This is in reply to your letter of June 13, 1994 in which you request confirmation of your interpretation as to the application of various sections of the Income Tax Act (the "Act") to the following situation. We apologize for the delay in responding.

The situation, as we understand it, is as follows:

1. A Canadian resident employee has received a loan from his employer in exchange for a note payable bearing a fixed interest rate of 5.45% per annum, effective November 1, 1991.

2. Any accrued interest and one-third of the principal is due and payable November 1, 1994 and November 1, 1995.

3. The remaining outstanding principal and any accrued interest is due and payable November 1, 1996.

4. Provided that the employee remains employed and in consideration therefor, the principal and accrued interest due on the note payable shall be forgiven as of the above-noted due dates.

You are of the view that interest at the prescribed rates would be calculated on the outstanding loan pursuant to paragraph 80.4(1)(a) of the Act and included in the employee's employment income for the particular taxation years under subsection 6(9) of the Act. The amount of the principal forgiven in the 1994, 1995 and 1996 taxation years would be included in the employee's employment income under paragraph 6(1)(a) of the Act pursuant to subsection 6(15) of the Act. In addition, the amount of accrued interest forgiven would, by virtue of paragraph 6(1)(a) of the Act, be included in the employee's income for the same years. You are also of the opinion that due to the limitation under subsection 4(4) of the Act, the amount of the accrued forgiven interest to be included in income under paragraph 6(1)(a) of the Act would be reduced by the benefit already included in income under subsection 6(9) of the Act, where such amount is less than the interest accrued at 5.45% per annum. Where the benefit included under subsection 6(9) of the Act is greater than the interest accrued at 5.45% per annum, then no benefit under paragraph 6(1)(a) of the Act arises in the 1994, 1995 and 1996 taxation years in regard to the forgiven interest.

Our Comments

Please note that enquiries relating to a factual situation involving completed or partially completed transactions should ordinarily be submitted along with all relevant facts and documentation to the local district taxation office for their views in this regard. We are however, prepared to make some general comments which should be of assistance to you. The following comments are made on the assumption that the employee in question is not a person described in subsection 15(2) of the Act in relation to receipt of the loan.

It is our view that, given that a loan is granted by virtue of employment and to the extent that the rate of interest on the loan is less than the prescribed rate, a deemed benefit in the amount of interest computed in the manner described under subsection 80.4(1) of the Act would be a taxable benefit to the employee and is required to be included in the employee's income pursuant to subsection 6(9) of the Act.

We are in agreement that, where an employee receives a loan from his employer in the course of his employment and that loan or part thereof is subsequently forgiven, for the purposes of paragraph 6(1)(a) of the Act, the employee shall be deemed to have received a benefit from employment which must be included in his income. The value of the benefit is calculated under subsection 6(15) of the Act to be the amount of the loan forgiven minus any repayment of the loan. Furthermore, in a situation where the accrued interest is also forgiven, an additional benefit is calculated under subsection 6(15) of the Act and included in income pursuant to paragraph 6(1)(a) of the Act.

Subsection 4(4) of the Act prevents the double inclusion or deduction, directly or indirectly, of an amount that has been, directly or indirectly, included or deducted in computing income under any other provision of Part I of the Act. Thus, in a taxation year where the accrued interest arising from an employee loan is forgiven and the deemed interest benefit on that loan, computed pursuant to subsection 80.4(1) of the Act and included in income under subsection 6(9) of the Act in previous taxation years, is greater than the accrued interest forgiven, no benefit under 6(1)(a) of the Act will result by virtue of the operation of subsection 4(4) of the Act. Where the deemed interest benefit computed pursuant to subsection 80.4(1) of the Act and included in income in previous taxation years by virtue of subsection 6(9) of the Act, is less than the amount of the accrued interest forgiven, then the benefit arising in respect of the accrued interest forgiven should be reduced by the deemed interest benefit previously included in income and the difference included in income pursuant to paragraph 6(1)(a) of the Act. Subsection 4(4) of the Act thus operating to exclude an amount of accrued interest forgiven which has already been indirectly included in income by virtue of subsection 6(9) of the Act.

In connection with these comments, we also note that subsection 80.4(3)(b) of the Act provides that subsections 80.4(1) and (2) of the Act do not apply in respect of any loan or debt, or any part thereof, that was included in computing the income of a person under Part I of the Act. Accordingly, to the extent that a portion of the loan is included in the individual's income for a year under subsection 6(1)(a), subsection 80.4(1) of the Act would not apply to that portion and no corresponding deemed interest benefit would be included in income pursuant to subsection 6(9) of the Act. This situation is discussed in further detail in paragraph 11 of Interpretation Bulletin IT-421R2, Benefits to Individuals, Corporations and Shareholders from Loans or Debt.

These comments represent a general interpretation of the law and, as such, may not be applicable in every situation. The determination of the tax consequences of a particular situation can only be made following a review of all the relevant facts and documentation.

Yours truly,

P.D. Fuoco
for Director
Business and General Division
Rulings Directorate
Policy and Legislation Branch

??