7 July 1991 Income Tax Severed Letter - Computation of the Cumulative Net Investment Loss

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.

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We are writing in reply to your letter of April 29, 1991, wherein you requested our comments on what you view as an inequity in the computation of the cumulative net investment loss (CNIL) under subsection 110.6(1) of the Income Tax Act (the Act), in the following situation.

An employee receives an interest free loan from an employer. The benefit computed under subsection 80.4(1), is included in the employee's income as income from an office or employment under subsection 6(9) of the Act. The employee then uses the proceeds of the loan to earn income from business or property, as the case may be.

It is your view that the interaction of section 80.5 and paragraph 20(1)(c) entitles the employee to an interest deduction to offset the taxable benefit computed under subsection 80.4(1). As a consequence it is also your view that a CNIL account will be created because the deduction permitted by the interaction of section 80.5 and paragraph 20(1)(c) will be included in "investment expense" as defined in subsection 110.6(1), while the corresponding amount included in income under subsection 6(9) will not have a corresponding offset in the definition of "investment income" as defined in subsection 110.6(1) of the Act.

Our Comments

We are unable to agree with your views in this regard. The reasons for our disagreement are as follows.

Section 80.5 does not entitle the employee to an interest deduction to offset the benefit computed under subsection 80.4(1) and included in the employee's income under subsection 6(9), as you contend. In order for the employee to be entitled to a deduction under paragraph 20(1)(c) by virtue of the deeming provision of section 80.5, the proceeds of the loan must have been used by the employee for the purposes of earning income from a business or property. If such is the case then the amount of the benefit, computed under subsection 80.4(1), is deemed to be interest paid pursuant to an obligation to pay interest on borrowed money and may be deducted in computing the aforementioned property income under paragraph 20(1)(c). In other words, if the proceeds of the loan are not used to earn income from a business or property, section 80.5 cannot be used in conjunction with paragraph 20(1)(c) to offset the benefit computed under subsection 80.4(1) of the Act.

The benefit calculated under subsection 80.4(1) and included in the employee's employment income under subsection 6(9), although calculated with reference to a prescribed rate of interest and interest paid or payable thereon, is not interest as such but rather employment income received by virtue of the office or employment. For this reason, section 80.5 of the Act was enacted to "deem" the amount of the benefit to be interest so that it could be deducted where business or property income was earned from an interest free or low interest loan provided by the employer.

In the situation described in your letter, we assume that the employee would earn income from the proceeds of the loan that would be included in income under either section 9 or 12 as the case may be. As a result, these amounts would be considered to be "investment income" as defined in subsection 110.6(1) that would offset the amount of the benefit included in "investment expense" as defined in subsection 110.6(1) of the Act.

However, if in the above circumstances a CNIL balance was created at the end of a particular taxation year, the creation of such an account does not permanently reduce or eliminate the amount of the capital gains deduction available since it reduces only the employee's cumulative gains limit at the end of that year and not the employee's cumulative gains limit at the end of that year and not the employee's lifetime capital gains deduction that can ultimately be claimed. In other words, net investment income in a subsequent year can reduce or eliminate a CNIL balance, thus partly or fully restoring the availability of the capital gains deduction within the limits imposed by section 110.6 of the Act.

We trust our comments will be of assistance to you.