17 December 1990 Ministerial Letter 901278 F - Voluntary Payments of Interest on 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.

19(1)

December 17, 1990

Dear Sirs:

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

This is in reply to your letter of June 11, 1990, wherein you requested our views on whether voluntary payments of interest would be considered to be interest paid for the year on a loan which bears no interest or bears interest at a rate lower than the prescribed rate for purposes of paragraphs 80.4(1)(c) and 80.4(2)(e) of the Act. We regret the delay in providing our response.

You referred to a letter written by this Department on April 3, 1981 wherein we set out four conditions which had to be met in order that a voluntary payment of interest by the employee be considered interest for the purpose of computing the taxable benefit under subsection 80.4(1) and in order that the loan be considered unmodified in the context of subsection 80.4(1.1) of the Act. You wish to know whether these conditions continue to apply.

Two of the conditions mentioned in the letter of April 3, 1981, namely that the payment be purely voluntary and that there be no change to the written agreement, specifically concerned the application of subsection 80.4(1.1) which was repealed effective for taxation years ending after 1981. That subsection provided an exemption from the application of section 80.4 where the actual interest paid for the year was equal to or greater than the interest that would have been payable thereon for the year if the interest had been charged at the rate of interest specified for the year in which the loan was made or last modified.

While subsection 80.4(3) would appear to be analogous to subsection 80.4(1.1), the exception in paragraph 80.4(3)(a) only applies where the rate of interest agreed upon at the time the loan was received is greater than or equal to the rate that would have been agreed upon under the conditions described therein. As the exemption in subsection 80.4(3) is based on the rate of interest as specified in the agreement rather than the actual interest paid for a particular year, a voluntary payment of interest on a loan would not affect the status of a loan which did not otherwise qualify for the exemption described in 80.4(3).

However, the Department is still prepared to accept that a timely voluntary payment by an employee to his employer is interest for the purpose of the calculation under section 80.4 provided that:

a)     the employer reports the payment as interest income,

b)     there is an actual payment by the employee, that is, no journal transfer or exchange of cheques, and

c)     the other conditions of section 80.4 are met.

It should be noted, however, that since the interest is paid voluntarily, it is not deductible under paragraph 20(1)(c) of the Act by the employee.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch