22 September 1999 External T.I. 9912495 - MORTGAGE INTEREST SUBSIDIES

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: Effect of new legislation on taxation of mortgage interest subsidy payments; effect of Siwik and Hoefele decisions on such payments; taxation of payments to employees to compensate for higher housing costs.

Position: New legislation applies to tax payments under 80.4 if loan received after February 23, 1998, and relocation occurred after September, 1998. If relocation occurred before October, 1998, it is effective in 2001. Loans received prior to February 24, 1998 may be governed by Siwik and Hoefele decisions. Payments made directly to employees with no mortgage are taxable.

Reasons: Prior opinions, and case law

XXXXXXXXXX					Wayne Antle
							5-991249

Attention: XXXXXXXXXX

September 22, 1999

Dear Sir/Madam:

Re: Home Relocation Loans

We are writing in response to your letter dated May 10, 1999 in which you ask for our comments concerning the effect of the new legislation on interest assistance payments made to employees to help them in relocating to areas with higher housing costs. You also ask for clarification on the effect of the Siwik and Hoefele cases on interest assistance payments that commenced prior to February 24, 1998. You have received prior opinions from Revenue Canada indicating that the interest assistance payments would be taxable in accordance with section 80.4 of the Income Tax Act (the "Act"), and the employee would be entitled to a deduction under paragraph 110(1)(j) of the Act if the loan met the definition of "home relocation loan" in subsection 248(1).

New subsection 6(23) provides that, for greater certainty, payments or assistance provided to an individual because of the individual's employment in respect of the cost, financing, use of, or right to use a residence are, for the purposes of section 6 of the Act, considered benefits received because of the individual's office or employment. This provision applies to payments or assistance received after February 23, 1998. However, where the assistance is in respect of an eligible relocation when the individual commenced work at the new location prior to October 1998, the provision is effective for the 2001 taxation year. New subsection 80.4(1.1) deems a loan to have been received because of an office or employment where it is reasonable to conclude that the terms of the loan would have been different, or it would not have existed, but for the individual's employment. This provision is applicable to loans received after February 23, 1998, except that for loans received after February 23, 1998 with respect to an eligible relocation where the individual commenced work at the new work location prior to October 1998, it is applicable to the 2001 taxation year. There is a new definition of eligible relocation in subsection 248(1) which defines it as a relocation to enable the taxpayer to be employed at a new work location in Canada, both the taxpayer's old residence and the taxpayer's new residence are located in Canada, and the new residence is at least 40 kilometers closer to the new work location than is the old residence. However, for the purposes of the moving expense deduction under section 62, as well as new subsections 6(19) to (22) relating to housing losses, where the individual is absent from, but resident in Canada, there is no requirement that the new work location, or the old or new residences, be located in Canada.

The above provisions were introduced as a result of the decisions reached in the Siwik and Hoefele cases. In those cases the Federal Court of Appeal ruled that mortgage interest subsidies received by employees, and benefits related to low interest loans provided by employers, were not taxable under either paragraph 6(1)(a) or subsection 6(9) of the Act where the employee is transferred to an area with higher housing costs, the employee owns a house immediately prior to relocation and purchases a house at the new location, and the amount of the loan is based on a reasonable market differential between the locations for comparable houses. The new provisions clarify that such assistance provided by an employer constitutes a taxable benefit from employment and should be included in income under paragraph 6(1)(a) or subsection 6(9) and section 80.4.

As a consequence of the Siwik and Hoefele cases, interest assistance payments made with respect to a loan that was given prior to February 24, 1998 would not be taxable if the facts are substantially the same as those in the above cases. However, the Department will not reassess when the request is based solely on the successful appeal to the Courts by another taxpayer unless a valid notice of objection has been filed. Accordingly, the Siwik and Hoefele decisions will only apply to years that are under objection or appeal. The Department would also consider a request for a reassessment if the year was open to objection or appeal.

With respect to the effective dates of the new legislation, you present the following three examples in your letter:

1. Interest assistance payments commence after February 23, 1998 in connection with an eligible relocation whereby the employee started work at the new location before October, 1998.

2. Interest assistance payments commence after February 23, 1998 in connection with an eligible relocation whereby the employee starts work at the new location after September, 1998.

3. Interest assistance payments commence before February 24, 1998 in connection with an eligible relocation whereby the employee starts work at the new location before October, 1998.

In the first example, the interest assistance payments made prior to January 1, 2001 would not constitute a taxable benefit. Payments received after this date would be included in income pursuant to subsection 6(9) and section 80.4 of the Act. In the second example, the interest assistance payments would result in a taxable benefit, calculated in accordance with section 80.4 of the Act, for 1998 and subsequent years. In both situations, the employees would be entitled to a deduction under paragraph 110(1)(j) of the Act if the loan meets the definition of "home relocation loan" in subsection 248(1) of the Act.

With respect to the third example, if the loan was granted prior to February 24, 1998 under circumstances substantially the same as those in the Hoefele and Siwik cases, the interest subsidy would not be taxable regardless of when the eligible relocation took place. However, it should be noted that the renewal of such a loan will normally be considered an acquisition of a new loan and subsection 80.4(1.1) will apply on the later of the renewal date and January 1, 2001 where the loan is in respect of an eligible relocation and the individual started work at the new location before October 1998. (Where one or both of these conditions is not present, the benefit will start at the renewal date because it will become a debt incurred after February 23, 1998 that does not meet the conditions in the coming into force provisions which defers the benefit to at least 2001.) This position regarding renewals also applies where there is a deemed renewal by virtue of subsection 80.4(6) of the Act

Finally, you ask for our comments concerning payments made directly to employees to compensate them for higher housing costs incurred as a result of an employer requested relocation, where the employee does not have a mortgage. These payments are taxable as employment benefits under paragraph 6(1)(a) of the Act regardless of when they were received, or when the relocation took place. Our position is supported by the decision of the Federal Court of Appeal in the case of William R. Phillips (94 DTC 6177).

We trust that our comments will be of assistance to you.

Yours truly,

R. Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch