18 July 1990 Ruling 900403 F - Low Interest Loans by Employers to Employees

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.

July 18, 1990

Dear Sirs:

Re:  Low Interest Loans

We are replying to your letter of April 9, 1990, concerning the - exceptions to the deemed benefit calculation under section 80.4 of the Income Tax Act.

You ask whether paragraph 80.4(3)(a) would apply to exempt an employee from the application of section 80.4 where an employer grants a loan to any employee at the prime rate of interest which is a rate offered only to preferred customers of the employer.

In our conversation of June 6, 1990 19(1)/Humenuk you indicate  It is a question of fact as to whether section 80.4 of the Act applies to any particular situation which can only be determined upon review of all relevant information and documentation.  If you have concerns about a particular situation, you may wish to obtain an advance income tax ruling as described in the attached Information Circular 70-6R "Advance Income Tax Rulings" in respect of a proposed transaction or you may wish to contact your local district taxation office in respect of an existing situation. Please note that the current rate for an advance income tax ruling is $80 per hour and the minimum fee has been replaced by a $400 deposit.  However, we would like to offer the following general comments concerning the issue you have raised.

Paragraph 80.4(3)(a) exempts a loan from the provisions of section 80.4 if, in addition to other criteria, the rate of interest agreed upon at the time the loan is made is equal to or greater then the rate that would have been agreed to at that time if the parties had been dealing at arm's length and the loan had not been received by virtue of an office, employment or a person's or partnership's shareholdings.  In determining whether the rate is a rate which would exempt the loan from the provisions of section 80.4, all the circumstances surrounding the loan including the terms and conditions of the loan must be considered.

While the employment of an individual or lack thereof would be a factor to be considered in determining whether an individual was a good risk for a loan and thus a preferred customer, it is our understanding that this factor alone is not sufficient to consider an individual to be a preferred customer entitled to a loan at the prime rate of interest.  If the lending institution considers an employee to be a preferred customer based primarily on the fact that the employee is an employee of that particular institution and not an employee of any other employer, it is our view that the loan will only be exempted from the provisions of section 80.4 if the employee would have qualified as a preferred customer even if he or she had not been an employee of that employer.

We trust our comments will be of assistance to you.

Yours truly,

for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch