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: Where a loan is acquired for the purpose of paying an existing mortgage plus penalties, does all of the new loan qualify as a "home purchase loan" as defined in subsection 80.4(7) of the Act?
Position: No
Reasons: The definition of "home purchase loan" includes only an amount used to acquire a home or an amount used to repay a loan used to acquire a home. In a refinancing context, a penalty does not comprise a portion of the amount originally borrowed to acquire a home.
2009-032831
XXXXXXXXXX Brenda White
519-645-5454
March 30, 2010
Dear XXXXXXXXXX :
Re: Home Purchase Loan
This is in response to your letter of June 12, 2009 wherein you requested clarification of the definition of "home purchase loan" in subsection 80.4(7) of the Income Tax Act (the Act). In particular, you refer to a situation in which a loan (the "Borrowed Amount") is acquired to repay a home purchase loan, but a portion of the Borrowed Amount is used to pay penalties due on the original loan. You ask whether the entire Borrowed Amount qualifies as a home purchase loan.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advanced Income Tax Rulings", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete, the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature only and are not binding on the CRA.
Subsection 80.4(1) of the Act provides for an amount to be included in a taxpayer's income in respect of a low interest or interest-free loan provided because of an individual's office or employment. This amount is basically interest at the prescribed rate on such a loan for the period it was outstanding during the year less any interest paid on such a loan. The total so calculated is deemed to be a benefit received in the year, and is brought into income under subsection 6(9) of the Act.
Where a loan meets the definition of "home purchase loan", subsection 80.4(4) of the Act provides that the deemed interest benefit must not exceed the amount determined by using the prescribed rate of interest in effect at the time the loan was received. The interest rate is fixed for periods of up to five years. The term "home purchase loan" is defined in subsection 80.4(7) of the Act and essentially means that portion of any loan received by an individual by virtue of his or her employment that is used to acquire, or to repay a loan that was received to acquire a dwelling for the individual or a related person.
For purposes of this reply, we have assumed that the original loan qualified as a home purchase loan. That being the case, notwithstanding that an amount borrowed to repay a home purchase loan will also meet the definition of that expression, it is our view that the use of the word "repay" has a limiting effect. In other words, in this context, one can only repay something that was, in fact, previously borrowed. Although the nature of the penalty is not clear from your correspondence, it is reasonable to conclude that the penalty amount was not part of the underlying debt used to acquire a dwelling. It follows that the portion of the Borrowed Amount used to pay the penalty would not meet the definition of a home purchase loan.
We trust these comments will be of assistance.
Yours truly,
Renée Shields
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2010
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2010
Email this Content