25 November 2003 External T.I. 2003-0043695 - EMPLOYEE LOAN FORGIVEN

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Taxable status of a loan to an employee to pay an income tax liability in a situation where it is anticipated that the loan will be forgiven.

Position: The forgiven amount will result in a taxable benefit.

Reasons: Where a loan to an employee is partially or fully forgiven after February 17, 1987, the forgiven amount is income in the hands of the employee in accordance with subsection 6(15) of the Act.

Randy Hewlett, B.Comm.

XXXXXXXXXX 613-957-8973
2003-004369
November 25, 2003

Dear XXXXXXXXXX:

Re: Employer Loan Forgiven

We are writing in response to your letter of October 10, 2003, wherein you requested our opinion on the above noted issue.

In your letter it was indicated that the XXXXXXXXXX (the "Employer") has a number of employees (the "Employees") who have an outstanding income tax liability resulting from a disallowed claim for a clergy residence deduction. The Employer is proposing to loan the Employees the funds to pay the outstanding income tax liability. The Employer anticipates that the loans will be forgiven. You inquired whether there would be adverse tax consequences for the Employees when the loans are forgiven.

Our Comments

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 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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

The CCRA's view on the income tax treatment of benefits arising from interest-free or low-interest loans and debts is discussed in Interpretation Bulletin IT-421R2, Benefits to Individuals, Corporations and Shareholders from Loans or Debt. This bulletin also discusses the tax consequences that may arise as a result of the forgiveness of these loans. As noted in paragraph 11 of IT-421R2, where a loan to an employee is partially or fully forgiven after February 17, 1987, the amount forgiven is included in the employment income of the employee by virtue of subsection 6(15) of the Income Tax Act. In our opinion, this income tax treatment would also apply to the loans that may be forgiven by the Employer in the situation described in your letter. The above publication can be found on the CCRA website at http://www.ccra-adrc.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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