6 November 1989 Ministerial Letter 58588 F - Subsidized Mortgages

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.

November 6, 1989

Dear Sirs:

Re:  Subsidized Mortgages Section 80.4 of the Income Tax Act (the "Act")

This is in reply to your letter of August 24, 1989, wherein you requested our opinion regarding the applicability of section 80.4 of the Act to an 24(1)

We advise that as your enquiry relates to a proposed transaction, it is more appropriately dealt with in the context of an advance income tax ruling.  Nevertheless, we are prepared to offer the following general comments on the application of section 80.4 of the Act.

We would comment at the outset that the capacity in which an individual receives a loan or other benefit is a question of fact which can only be determined on a case-by-case basis in light of all of the surrounding facts and circumstances.  Furthermore, subsection 80.4(1) of the Act refers to situations in which "a person or partnership received a loan or otherwise incurred a debt by virtue of the office or employment...".  It is the capacity in which the individual received the loan at the time it was made that determines whether or not it comes within section 80.4 of the Act.

Where an employee negotiates a loan from a third party on his own initiative without any involvement of his employer, the fact that the employer may at some subsequent date become involved in that loan by directly ar indirectly subsidizing the cost of the employee's loan interest will not tender that loan a loan received "by virtue of his office or employment".  In such a situation, the employee would normally be taxed pursuant to paragraph 6(1)(a) of the Act on any benefit enjoyed by virtue of his employer's subsidization of his interest costs.

When such a loan comes up for renewal, the loan then may be considered to be a loan to which section 80.4 of the Act applies.

The fact that a loan is received by an officer or employee or his spouse or by an individual who is t become an officer or employee or by his spouse, from a party other than his employer is not necessarily indicative that such loan has not been received by virtue of his office or employment.  In determining whether a loan was made by virtue of an office or employment, the Department will take into consideration any involvement or assistance by his employer in obtaining the loan, including

(a)     involvement in negotiation of the loan,

(b)     guaranteeing repayment of the loan principal or interest,

(c)     recommending in writing to the lender that the loan be made,

(d)     agreement in writing before the loan is made, to assist with the cost of the interest either by direct reimbursement to the borrower for all or part of it or by paying such interest directly to the third party lender, or

(e)     providing the individual with a letter of introduction to a mortgage lender explaining the amount and terms of the mortgage interest subsidy which the employer will be making to the employee.

In the situation where to employees are granted a loan jointly, it is our view that the benefit, if any, to be calculated pursuant to section 80.4 of the Act is generally to be reported on a 50-50 basis.  However, we recognize there may be circumstances where the benefit to be reported would be split differently depending upon the facts in each particular situation.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch