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:
when a mortgage interest subsidy is provided to a relocated employee to compensate for higher housing costs in the new location, whether a taxable benefit be included in the employee's income (in light of the Supreme Court's denial of the Department's leave to appeal the Hoefele decision)?
Position:
a benefit under 6(1)(a) will be assessed unless the situation is the same as in Hoefele (see body of text below for three conditions).
Reasons:
DRAFT
Revenue Canada Round Table
Tax Executives Institute
December 10, 1996
Question #Xl.
MORTGAGE INTEREST SUBSIDY
In Question XI of last year's liaison meeting agenda we posed the following:
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' mortgage.
Paragraph 4 of IT-421R2 (Benefits to Individuals Corporations and Shareholders from Loans of 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(1)(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,(1) Revenue Canada asserted that subsidized interest provided under and employer's mortgage interest subsidy program similar to that described above conferred a taxable benefit to the employee under paragraph 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?
To which we received the following response:
The Department is reviewing its position in light of the Federal Court of Appeal's decision in the cases of Hoefele, Zaugg, Mikkelson, 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 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.
The Department subsequently sought leave to appeal the Hoefele, et al, decisions to the Supreme Court. In light of the Supreme Court's denial of leave to appeal, will Revenue Canada advise how employers should report mortgage interest subsidies?
Department's Position:
If a mortgage interest subsidy is provided to a relocated employee to compensate that employee for higher housing costs in the new location, a taxable benefit under paragraph 6(1)(a) of the Act should be reported for 1996 unless the situation is substantially and materially the same as found in Hoefele.
In this regard, a benefit under paragraph 6(1)(a) will be assessed unless all of the following conditions are met:
1.The subsidy is limited to only that portion of the mortgage charges which relates to (i) the increase in interest charges on the costlier home in the new location up to the maximum allowed by a valid market price differential and (ii) any increased interest charges stemming from increased mortgage interest rates for the remaining term of the previous mortgage (as established in Splane). The market price differential must be predicated on the difference in market values between similar homes in the two locations.
2.No amount of mortgage principal is reimbursed or subsidized.
3.There is no change in the employee's equity in the residence (dollar equity in new residence is the same as that which was held in the old residence)
If the employee receives a mortgage because of or as a consequence of employment, then an assessment under subsection 80.4(1) and subsection 6(9) may still be applicable.
Author: S. Short
File: 963907
Date: November 27, 1996
ENDNOTES
1. Hoefele v. The Queen, 94 DTC 1878; Zaugg v. The Queen, 94 DTC 1882; Mikkelson v. The Queen, 95 DTC 5602; Krall v. The Queen, 95 DTC 5602; and Krull v. The Queen, 95 DTC 5602.
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