29 September 1987 Income Tax Severed Letter

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.

MEMORANDUM

DATE SEP 29 1987

To- Mr. R.M. Beith Executive Director General Legislative and Intergovernmental Affairs Branch

FROM- Specialty Rulings Directorate B. Fields 957-2096

RE: Forgivable Government Loans

In our response to question No. 18 at the June 2, 1987 conference sponsored by the XXXX we indicated that all government loans that are forgivable, whether contingently or otherwise, would come within the ambit of paragraph 12(1)(x) of the Act. Only loans which were unconditionally repayable would be excluded. Subsequent to the conference it was noted that our spoken response could be viewed as being in conflict with the contents of paragraph 28 of Interpretation Bulletin IT-293R , which indicates that:

"Where the terms of a government loan include a forgiveness feature contingent upon the happening of an event that is considered remote at the time the loan is negotiated, the provisions of subsection 13(7.1) and paragraph 53(2)(k) with respect to "forgivable loans" are not considered applicable. Thus, if the forgiveness feature becomes operative, the provisions of section 80 apply. One example of a loan of this type is the 1976 Assisted Rental Program (ARP) of Central Mortgage and Housing Corporation (CMHC)."

Although the bulletin sites the ARP as an example the position therein is based solely on correspondence related to the ARP. Under the ARP, CMHC provided second mortgages to qualified applicants. Although the possibility of forgiveness existed, the possibility was considered remote at the time the loan was granted since the forgiveness would only arise to the extent the selling price of the property was insufficient to cover the first mortgage, the investor's capital, and all or part of the ARP second mortgage.

Forgivable loans are defined in paragraph 2 of IT-340R , for the purpose of making the distinction between repayable awards under paragraph 56(1)(n), as a loan which the lender is committed to forgive if certain conditions are met by the borrower. This definition which mirrors the CICA definition would, in our view, also be appropriate for the purposes of paragraph 12(1)(x). Technically, there is no doubt that a forgivable loan would come within the ambit of paragraph 12(1)(x) provided, of course, the other requirements contained therein are met. In view of the government's intention to forgive the loan, there is, in substance, no difference between a forgivable loan and a grant to which there is attached a contingent liability for repayment. Further, in the event the amount of such a loan has been included in income pursuant to paragraph 12(1)(x) and the borrower is subsequently required to repay the loan or a portion thereof, paragraph 20(l)(hh) would apply to allow the borrower a deduction for the amount of the repayment.

Consequently, in view of the fact that IT-293R was last revised before the enactment of paragraphs 12(1)(x) and 20(l)(hh), the government's intention to forgive the loan, the fact the test provided in paragraph 28 of IT-293R is not provided for in the legislation, and the potential for disputes regarding the possibility of forgiveness, we prefer to leave the response to the XXXX in its current form and apply paragraph 12(1)(x) at the time the loan is granted to those loans where the possibility of forgiveness is provided for under the terms and conditions of the loan.

Director General Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch