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.
Principal Issues: Does an employer assisted mortgage result in a taxable benefit where the employer pays a portion of the monthly/weekly interest or pays a lump sum at the beginning of the mortgage.
Position: Yes, if the amount of interest paid by the employee is less than the prescribed rate. General comments provided.
Reasons: Subsection 80.4(1)
XXXXXXXXXX 2010-038420
Ann Townsend
March 8, 2011
Dear XXXXXXXXXX :
Re: Employer Assisted Mortgages
I am writing in response to your fax of August 10, 2010 asking for our comments concerning two employer assisted mortgage programs developed by a mortgage broker. Both programs are available to Canada corporations that want to provide home relocations loans and home purchase loans to employees. In both scenarios the mortgage broker will arrange the mortgage with a lender for a maximum period of five years and the interest paid by the employee will be calculated at the prescribed rate. The first program you have referred to as the Mortgage Interest Rate Subsidy ("MIRS"), which is a program where the employer will directly subsidize the monthly/weekly interest payments. The second program is the "Mortgage Interest Rate Buy-Down" ("MIRBD"), where the employer will advance a set amount of money at the beginning of the mortgage to be used to buy-down or reduce the interest rate payable by the employee during the term of the mortgage. You are requesting confirmation that these programs will not result in a taxable benefit to the employees.
Written confirmation of the tax implications inherent in a particular transaction is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments that may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Subsection 80.4(1) generally provides that where an employee receives an interest free or a reduced interest loan because of office or employment, the individual is deemed to have received a benefit from employment. The amount of the benefit is calculated as the difference between the interest actually paid by the employee and the interest computed at a prescribed rate on the outstanding balance of the loan. The prescribed interest rate is determined in accordance with sections 4300 and 4301 of the Income Tax Regulations.
Additional rules apply for a "home purchase loan" or a "home relocation loan". Both of these are defined terms under the Act. Generally, a home purchase loan is a loan received by an employee to acquire or refinance a dwelling for the employee, or a person related to the employee. The dwelling must be for the employee's own use and not for use as rental property. A home relocation loan is generally a housing loan received by an employee where the employee commenced employment at a new work location. The employee's new residence must be at least 40 kilometres closer than the old residence, to the new work location.
Subsection 80.4(4) provides that where the loan meets the definition of a home purchase loan or a home relocation loan, the prescribed rate of interest will not exceed the prescribed rate that is in effect at the time the home purchase loan was made. The taxable benefit is calculated as the lesser of the prescribed rate in effect for the period in question and the prescribed rate in effect at the time the loan was received. The lesser of these two amounts less the amount of interest actually paid is the taxable benefit received. The term of the repayment for a home purchase loan or a home relocation loan cannot be more than five years. Where the term is greater than five years, the balance owing at the end of five years is considered a new loan.
It is a question of fact whether or not an individual receives a loan because of the office or employment. Subsection 80.4(1.1) provides in part that a loan or debt is deemed to have been received or incurred because of an individual's office or employment if it is reasonable to conclude that the terms of the loan or debt would have been different but for the individual's office or employment. The determination would generally take into consideration the degree of involvement of the individual's employer in securing the loan, for example, whether the employer provides documentation to the lender to support the employee's loan application, guarantees the principal and/or interest, and pays the interest subsidy to the lender.
Based on the information you provided and the fact that the employer will be paying an interest subsidy to the lender, it is reasonable to conclude that under both programs the mortgages will be received as a result of employment and therefore that subsection 80.4(1) will apply. For both programs, the taxable benefit would be equal to the amount, if any, by which the interest computed at the prescribed rate on the outstanding balance of the loan for the period in question exceeds the interest actually paid by the employee. Provided the loan meets the definition of the home purchase loan or a home relocation loan, the prescribed rate of interest will not exceed the prescribed rate that was in effect at the time the home purchase loan was made. However, if based on additional facts it is found that subsection 80.4(1) does not apply to assess a benefit, a taxable employment benefit may be assessed pursuant to paragraph 6(1)(a) and subsection 6(23). This benefit will be then calculated as the actual amount of the interest subsidy paid by the employer.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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