24 August 1998 External T.I. 9818475 - LOW INTEREST EMPLOYEE LOAN

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.

DOCUMENT TYPE: Tax Services Office Memo

Principal Issues: low interest loan later repaid with interest pursuant to court order, amend t4's?

Position: t4's cannot be amended, deduction for interest 'expense' cannot be claimed

Reasons: interest was not paid within 30 days after the end of the year as required by 80.4 so T4 cannot be changed.

80.5 deems this interest to be pursuant to legal obligation but loan used to acquire principal residence. No deduction as funds not used to earn income from business property or employment (8(1)(j)(i))

					August 24, 1998

	Nona Larrett		HEADQUARTERS
	Business Window		N. Graham
	Toronto North TSO		(613) 957-2136
					981847
	Low Interest Rate Loan

We are writing in reply to your Round Trip Memorandum received July 16, 1998 concerning XXXXXXXXXX. You have requested our views on the treatment of an interest benefit that has been included in an employee's income under subsection 80.4(1) in 1994 to 1997.

As we understand the facts:

• An employee was provided a low interest loan by his employer.
• You advised by telephone (Larrett/Graham) the employee had used the loan to assist in the purchase of his principal residence.
• The employee had amounts included in his income under subsection 80.4(1) and 6(9) and the individual received a T4 in 1994 and T4A's in 1995 and 1996 for the amount of the deemed interest benefit.
• The employee was dismissed by the company in 1994.
• No interest was paid on the loan in 1994 through 1997.
• The former employer launched legal action to secure repayment of the loan of approximately $XXXXXXXXXX.
• As a result of the courts decision regarding the loan to the former employee, the individual was required to repay the loan, with pre-judgment interest from XXXXXXXXXX. He was to pay post-judgment interest from XXXXXXXXXX to the date of payment. XXXXXXXXXX paid these amounts in 1998 after his wrongful dismissal action had been resolved by the court.
• Concurrent with the employer's legal action to collect on the outstanding loan, was a legal action by the employee concerning wrongful dismissal. The employee was awarded a lump sum and pre-judgment interest from XXXXXXXXXX, along with post judgment interest to the date of payment.

The employee has written the employer asking for an amendment of the 1994-1997 T4's and T4A's to exclude the deemed interest benefit from income. Presumably, this request was made on the basis that the taxpayer felt the interest he paid in accordance with the court order offset the earlier benefit as shown on the T4 and T4A's.

The deemed interest benefit resulting from a low interest loan to an employee, who is not a shareholder, is computed in subsection 80.4(1) and included in the individual's employment income under subsection 6(9). Section 80.5 deems the benefit to be interest paid in respect of a legal obligation on borrowed money for purposes of subparagraph 8(1)(j)(i) and paragraph 20(1)(c).

Subparagraph 8(1)(j)(i) allows for a deduction for interest paid in respect of monies borrowed to acquire a motor vehicle used or and aircraft required for use in the performance of the duties of employment. Paragraph 20(1)(c) permits a deduction for interest on money borrowed to earn income from a business or property.

As pointed out in the correspondence you provided to us, there is a clear legislative requirement to include an interest benefit in the income of the employee or former employee. This benefit can only be reduced in respect of amounts paid in the year or not later than 30 days after the end of the year. This is not the case here and in our view, the T4/T4A's cannot be amended.

In order for the individual to be able to claim a deduction for 'interest expense,' the use of the funds must qualify within subparagraph 8(1)(j)(i) and paragraph 20(1)(c). However, any amounts that would have been deductible within these provisions, would have already been claimed as a deduction in each year the benefit was included in XXXXXXXXXX income. There is no provision in the Income Tax Act to permit the deduction of this payment based on the facts provided to us.

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch