6 December 1995 Internal T.I. 9530370 - COMMENTS ON FCA DECISION IN THE CASE OF HOEFELE ET AL

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:

mortgage interest subsidies

Position:

subsidies to compensate for higher cost of living is taxable

Reasons:

Dept has sought leave to appeal Hoefele et al decision to SCC

DRAFT

Revenue Canada Roundtable
Tax Executive Institute Conference
December 6, 1995

Question No. XI

MORTGAGE INTEREST SUBSIDY

Many financial institutions in Canada offer their corporate customers a lending program that permit the customers, in turn, to offer their employees a subsidized mortgage interest program. The customers' programs may be open to some or all employees. Under the program, the financial institution provides mortgage financing to qualified employees with the employer making payments to the financial institution to subsidize some or all of the interest due on the employee's mortgage. Such programs can be used to assist employees who have relocated to a new location at the request of the employer and as a result are in need of a new mortgage for the new residence.

Paragraph 4 of IT-421R2 (Benefits to Individuals, Corporations and Shareholders from Loans or Debts) states that, depending on the facts, a loan to an employee by a person other than his employer may be subject to the provisions of section 80.4. Based upon this paragraph (and, very likely, upon advanced tax rulings or written opinions from Revenue Canada), financial institutions and employers have, pursuant to the rules contained in section 80.4, subsections 6(9) and 248(1), paragraph 110(a)(j), and applicable regulations of the ITA, determined the amount of taxable benefit to include in the employees' income.

In five cases at the Tax Court of Canada, Revenue Canada asserted that subsidized interest provided under an employer's mortgage interest subsidy program similar to that described above conferred a taxable benefit to the employee under 6(1)(a). Although the government's position was upheld in the Krull decision, the taxpayer appealed. In the four cases it lost, the government appealed, asserting that the mortgage subsidy was taxable under either paragraph 6(1)(a) or section 80.4. The Federal Court of Appeals consolidated the cases and decided in each case that no taxable benefit was conferred on the employee under either paragraph 6(1)(a) or section 80.4.

In light of these rulings rejecting the government's assertion, will Revenue Canada clarify how employers should report the mortgage interest subsidy for the 1995 taxation year in respect of those employees who received the subsidy as a result of an employer-requested relocation?

Department's Position

The Department is reviewing its position in light of the Federal Court of Appeal's decision in the cases of Hoefele, Zaugg, Mikkelsen, Krall and Krull and has until December 10, 1995 to file its application to seek leave to appeal to the Supreme Court of Canada.

Accordingly, for the purpose of T4 reporting for 1995, the Department's position continues to be that such mortgage interest subsidies are taxable either as the payment of a personal living expense or as a loan received by virtue of employment. Where an employer provides a mortgage interest subsidy to an employee, the benefit should be determined under subsection 80.4(1) of the Act if the mortgage can be considered to have been received by virtue of employment. If there was no employer participation in obtaining the mortgage, the full amount of the subsidy should be included in income as a taxable benefit under paragraph 6(1)(a) of the Act.

The Department accepts however, that mortgage interest differential payments of the type at issue in the Splane decision (90 DTC 6442, affirmed by the Federal Court of Appeal, 92 DTC 6021) are not taxable when paid in the circumstances set out in that case which also involved an employer-requested relocation.

Author: A. Humenuk
File: 953037
Date: November 29, 1995

Editor's Note: The Department has subsequently sought leave to appeal the Hoefele et al. decision to the Supreme Court of Canada.

ENDNOTES

^1. Hoefele v. The Queen, 94 DTC 1878, Zaugg v. The Queen, 94 DTC 1882, Mikkelsen v. The Queen, 95 DTC 118, Krall v. The Queen, 95 DTC 411, and Krull v. The Queen, 95 DTC 206