8 August 1985 Income Tax Severed Letter B-6200 - [Treatment of Tuition Fees Reimbursed as Forgiveable Loans]

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.

August 8, 1985

Non-Corporate Rulings Division

D.Y. Dalphy 993-7295

RE: XXXX Treatment of Tuition Fees Reimbursed as Forgiveable Loans, Amortized Over 33 Months and Living Costs Advanced Interest Free

This is in reply to your memorandum of June 25, 1985 and relevant attachments. In order to determine whether a transfer of funds to an employee can be characterized as a forgiveable loan or a repayable award, reference must be made to the agreement between the donor and the recipient. That is, the rights and obligations which flow from the contract will indicate the proper classification of the transaction. As per Interpretation Bulletin IT-340R , if the agreement gives rise, at the time of the transfer of funds to the employee, to a legally enforceable debt, the transfer would be considered to be a loan. If, however, the agreement specifies that the amount does not become a debt unless the recipient fails to fulfill certain conditions, then the transaction would be in the nature of a repayable award.

The classification of such a transfer is a question of fact to be determined after consideration of all the relevant circumstances. Paragraph 2 of Interpretation Bulletin IT-222R sets out several factors to be considered in such a determination. XXXX letter of November 25, 1983 seems to indicate that an enforceable debt arises upon receipt of the assistance by the employee XXXX. You may want to examine other documents of contract if any, between XXXX and its employees to determine if these documents contain any other evidence regarding the transaction that would rebut or clarify the contents of XXXX.

If the basis for a bona fide loan is an employment relationship XXXX, where services in employment are the effective cause of the payment or funds, then if part of, or the entirety of, the loan is forgiven, the amount forgiven is a benefit received by virtue of employment and, as such, would constitute income from employment in the year of forgiveness by virtue of paragraph 6(l)(a) of the Income Tax Act (the "Act"). That is, the portion of the loan which was forgiven in a taxation year would be included in the employee's income in the year of forgiveness. Accordingly, paragraph 5 of Interpretation Bulletin IT-340R applies to a case where a bona fide loan is made to an employee who maintains continuous employment.

With regard to the interest benefit enjoyed by an employee by virtue of funds loaned at no interest for the payment of an employee's tuition fees and living costs, subsections 80.4(1) and 6(9) of the Act would apply. Accordingly, the value of any benefit arising from interest paid thereon "at less than a prescribed rate" will be included in an employee's income to the extent provided by section 80.4 of the Act until such time as the loan principal has been repaid or forgiven.

In closing, we refer you to paragraphs 22 and 23 of Interpretation Bulletin IT-82R3 for guidance in distinguishing between deductible and non-deductible fees.

We hope this information will be of assistance.

for Director Non-Corporate Rulings Division

60(f) 6(1)(a), 6(9) 80.4(1)