15 November 1999 External T.I. 9922545 - EMPLOYEE RELOCATIONS-FORGIVABLE 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 compensation on relocation.

Position: Timing of taxation depends on whether the compensation is considered a bona fide loan.

Reasons: If the compensation is considered a loan, any forgiven amount would be included in income under subsection 6(15) of the Act. If the compensation is not considered a loan, it is also not considered to have been paid in respect of a "housing loss" as defined and is therefore not be subject to the provisions of 6(19) through to 6(22). The entire compensation payment would be included in income under paragraph 6(1)(a).

		5-992254
XXXXXXXXXX 	Karen Power, CA
(613) 957-8953
Attention:  XXXXXXXXXX 

November 15, 1999

Dear XXXXXXXXXX:

We are writing in response to your letter dated August 9, 1999 requesting our comments on whether compensation on relocation will result in taxable benefits to an employee in the situation described below. We acknowledge receipt of a copy of the XXXXXXXXXX (the "Agreement").

Our understanding of the facts is as follows:

XXXXXXXXXX.

Our Comments

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R3, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of some assistance to you.

New subsections 6(19) to 6(22) of the Income Tax Act (the "Act") provide special rules for taxing payments made by an employer in respect of a "housing loss" incurred by an employee. Subsection 6(21) of the Income Tax Act (the "Act") defines a housing loss as follows:

"(21) Housing loss. In this section, "housing loss" at any time in respect of a residence of a taxpayer means the amount, if any, by which the greater of

(a) the adjusted cost base of the residence at that time to the taxpayer or to another person who does not deal at arm's length with the taxpayer, and

(b) the highest fair market value of the residence within the six-month period that ends at that time exceeds

(c) if the residence is disposed of by the taxpayer or the other person before the end of the first taxation year that begins after that time, the lesser of

(i) the proceeds of disposition of the residence, and

(ii) the fair market value of the residence at that time, and

(d) in any other case, the fair market value of the residence at that time."

Subsection 6(19) of the Act requires the employee to include in income an amount paid in respect of a housing loss, unless it is an eligible housing loss. An eligible housing loss is defined in subsection 6(22) of the Act to be a housing loss in respect of an eligible relocation. An eligible relocation is defined in subsection 248(1) of the Act and is basically a relocation to enable the taxpayer to be employed at a new work location; both the taxpayer's old residence and the taxpayer's new residence are located in Canada; and, the new residence is 40 kilometers closer to the new work location than is the old residence. Where an eligible housing loss is paid to an employee, one half of the excess of the amount that exceeds $15,000 must be included in income pursuant to subsection 6(20) of the Act.

Any amount paid in respect of a housing loss, or an eligible housing loss where the employee commenced work at the new work location after September, 1998, must be included in income where that amount was paid after February 23, 1998. However, for eligible housing losses where the employee commenced work at the new work location prior to October 1998, no amount is required to be included in income if it is paid before the year 2001.

In our view, the compensation paid to Mr. A pursuant to the Agreement is not paid in respect of a "housing loss" nor an "eligible housing loss" as defined in subsections 6(21) and 6(22) respectively. As a result the compensation paid to Mr. A will not be subject to the provisions of subsections 6(19) through to 6(22) of the Act.

In our view, if the compensation paid under the Agreement to Mr. A is not considered a bona fide loan (see discussion below), the entire compensation payment would be included in income pursuant to paragraph 6(1)(a) of the Act.

It should be noted that if an employee were to be taxed on the amount of this payment in the year received, there is no provision in the Act for a deduction for any amount the employee may be required to repay.

Forgivable Loan

As we have previously indicated in our letter of September 4, 1998, our file #981973, the taxation of the employee compensation depends on whether or not the compensation is considered a bona fide loan. 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.

Furthermore, 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. Subsection 80.4(1.1) 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. For loans received after February 23, 1998, where the employee did not commence work at the new work location before October 1998, the provision is effective at the time the loan is received.

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. In this situation, in our view, the fact that the Agreement indicates the Employer will withhold deductions at source is an indication that the monies are not considered a loan or advance. However, if the payment is a bona fide loan, amounts, as forgiven, should be included in the employee's income in accordance with subsection 6(15) of the Act.

We trust that our comments will be of assistance.

Yours truly,

R. Albert, C.A.

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