4 September 1998 External T.I. 9819735 - FORGIVABLE RELOCATION 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.

Principal Issues: Treatment of relocation payment pre September 30, 1998

Position: amounts may be taxable or non-taxable depending on employee circumstances

Reasons:

amount paid as forgivable loan is income as forgiven, not at the time loan is made. If payment reimburses loss per IT470 R paragraph 37, amount is not taxable.

XXXXXXXXXX 								981973
N. Graham
September 4, 1998

Dear XXXXXXXXXX:

Re: Forgivable Relocation Loan

We are writing in response to your July 23, 1998 correspondence wherein you requested our views on the tax treatment of an incentive payment to compensate certain XXXXXXXXXX employees for the decline in value of the employee’s homes. Specifically, your inquiry relates to the implications of such payments made to employees who will report to their new work locations prior to September 30, 1998.

The 1998 Federal Budget proposes to change the tax treatment of relocation related payments made to employees reporting to their new work location after September 30, 1998. We have restricted our comments to pre-September 30 relocations as draft legislation has not yet been released by the Department of Finance. Should you wish further interpretation of these new provisions after the draft legislation is released, please contact us at that time and we would be pleased to respond.

We acknowledge telephone conversations (XXXXXXXXXX/Graham) and the receipt of a copy of the XXXXXXXXXX

XXXXXXXXXX

Our Comments

Treatment of Advance

Interpretation Bulletin, IT-421R2, Benefits to individuals, corporations and shareholders from loans or debt, states: “Employees may receive low interest or interest-free loans when they are transferred by their employer to a new location. The transfer may have been initiated due to matters of labour relations or because the employee accepted the transfer in order to retain his or her position of employment. If a loan is received by virtue of an office or employment of a transferred employee, the taxable benefit arising from the loan would be calculated pursuant to subsection 80.4(1) .... A benefit calculated under the provisions of section 80.4 is brought into the income of the individual under subsection 6(9).” The provisions of paragraph 110(1)(j) may provide a deduction from this benefit, if the loan qualifies as a home relocation loan.

Paragraph 11 of this IT Bulletin states that “where a loan to an employee is partially or fully forgiven... the amount forgiven is income in the hands of the employee in accordance with subsection 6(15).”

To determine whether an amount is income, the amount received must have the quality of income, that is, the employee’s entitlement or right to the amount must be absolute and under no restriction, contractual or otherwise, as to its disposition, use or enjoyment. In case law, amounts have been held not to be income because the employee did not have the “absolute right” to the monies. However, as the agreement indicates, and as you have described to us, the employer will withhold deductions at source. The fact that the employer withholds source deductions is an indication that the monies are not considered a loan or advance.

In our view, if the payment is a bona fide loan, only the amounts forgiven should be included in the employee’s income. If an employee were to be taxed on the amount of this payment in the year the advance is made, there is no provision in the Income Tax Act (the “Act”) for a deduction for any amount the employee may be required to repay.

Treatment of payment in respect of decline in housing values

Interpretation Bulletin IT-470R, Employee’s Fringe Benefits, paragraph 37, states “if an employer reimburses an employee for a loss suffered by the latter in selling the family home upon being required by the employer to move to another locality...the amount so reimbursed is not income of the employee if it is not greater than the actual loss calculated as the amount by which the cost of the home to the employee exceeds the net selling price received for it. Similarly, where an employer guarantees to give to an employee an amount equal to the amount by which the fair market value of the home (as independently appraised) exceeds the actual selling price obtained, the amount so given is not income in the hands of the employee. Should the employer buy the home from the employee, no taxable benefit is included in the employee’s income if the price paid by the employer does not exceed the greater of the cost of the home to the employee and the current fair market value of comparable homes in the same area.”

If the payment were to fall within the comments of IT-470, the amount may not be taxable. This determination would have to be made on a case by case basis. The agreement provides that every employee will get a payment of at least $XXXXXXXXXX if they meet the home ownership requirements. There is no requirement to dispose of the property. In our view, this amount would be fully taxable as employment income subject to the comments above on loans.

We trust that these comments will be of assistance.

Yours truly,

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