Re: Employee Mortgage Loans
This is in reply to your letter of October 15, 1990 concerning the 24(1) 24(1) You have requested our views on the following.
(a) Where an employee receives a loan on October 1st, 1990 but renegotiates the terms of the loan including loan balance, interest rate, and amortization period on October 1st, 1991, should the Bank continue using the prescribed rate in effect on October 1st, 1990 for the purpose of applying subsection 80.4(4) of the Income Tax Act or should it start using the prescribed rate in effect on October 1st, 1991?
(b) What are the factors considered by Revenue Canada to determine if a new loan is created and replaces the original loan and therefore if a new prescribed rate must be used?
(c) Do the following circumstances give rise to the creation of a new loan?
(i) Portable Mortgage
Where an employee sells an existing house to purchase a new one, the interest rate on the original mortgage can be "ported" to the new mortgage. However, to achieve this a new mortgage loan must be advanced to the employee to pay off the old mortgage loan. Should the bank use a new prescribed rate for computing the taxable benefit arising from the new mortgage loan?
(ii) Prepayment
Where an employee prepays a mortgage loan in accordance with the terms of a loan agreement, for example a 10% partial payment, the original amount is reduced. Should the bank use a new prescribed for computing the taxable benefit arising from the reduced mortgage loan?
(iii) Renewal
Where an employee renews a mortgage loan at the end of a term, the interest rate is changed and fixed according to current market conditions. The loan balance and amortization period may change or remain the same. Should the bank use a new prescribed rate for computing the taxable benefit arising from the reduced mortgage loan?
All of the above questions involve a determination of whether or not the revision to the arrangements constitute a new loan. If there is a new loan a new prescribed rate would be used to calculate the benefit. Subsection 80.4(6) of the Act deems a new home purchase loan to be received every five years where the repayment term of such a loan exceeds 5 years. Subject to this special provision, the Income Tax Act does not provide any rules which would aid in the determination of whether or not a new loan is created for the purposes of section 80.4.
We believe the comments in IT-448 will be of assistance in this matter. This IT explains the Department's views on the circumstances that may result in a disposition of a security. If there has been a disposition of the existing loan it necessarily follows that a new loan is created.
The comments in paragraphs 2 to 8 of this bulletin may be of particular interest. You will note that there are no "hard and fast" rules of universal application (see paragraph 4). Nevertheless, paragraph 7 indicates that changes which are fundamental to the economic interests of the parties usually result in a disposition. Some examples are a change in the repayment schedule or maturity date or an increase or decrease in the principal amount.
Applying the comments in the bulletin it is our view that usually, a renegotiated loan ((a) above), and a renewal ((c) above) would constitute a new loan. A prepayment, under the terms of existing
loan providing for such prepayments, would not normally result in a new loan, assuming most other aspect of the loan remain as arranged. In the case of a "ported" mortgage it would be necessary to examine the particular facts to determine if the transaction was merely a change in the underlying security as discussed in paragraph 6 of IT-448 or was more "fundamental".
We trust this information will be of assistance.
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch