This is in reply to your letter of November 5, 1990 concerning the calculation of a taxable benefit in respect of a mortgage loan you received from your employer 24(1)
You have indicated in your letter that, in your capacity
24(1)
You have asked whether the benefit is computed based on the difference between the market rate and the rate you are being charged or on the difference between a "deemed" rate and the rate you are being charged.
Unfortunately, it is not possible to comment on your specific situation without reviewing the related documentation and all the relevant facts. However, we are providing you with the following general comments which we hope will be of assistance to you.
Where certain low interest loans are made by an employer to an individual in his capacity as an employee, the Income Tax Act contains provisions which deem the employee to have received a taxable benefit. The amount of the taxable benefit is equal to the amount by which interest for the year on the loan calculated at a prescribed rate exceeds the interest for the year paid on the loan no later than 30 days after the end of the year. The prescribed rate of interest for low interest or interest-free loans during a quarter is defined in the Income Tax Regulations to be the average rate on 90 day Treasury Bills sold during the first month of the preceding quarter, rounded up to the nearest percentage point. For the four quarters of 1990, the respective rates are 13%, 13%, 14%, and 14%. For your further information, we are enclosing a copy of Interpretation Bulletin IT-421R which outlines the tax treatment of such loans in more detail.
However, there are special provisions in the Income Tax Act for "home purchase loans" (see paragraphs 13 to 18 of the enclosed Bulletin). Please note that in order to qualify as a home purchase loan the proceeds of the loan must have been used to acquire a dwelling or to repay a debt that had been incurred for that purpose. With respect to such a loan, a ceiling is placed on the amount of the computed benefit to be included in income in future years. This gives a taxpayer an assurance that, in those years, the deemed benefit will not increase if the prescribed rate increases but allows the taxpayer the benefit of any lower rate if the prescribed rate later decreases below the prescribed rate in effect at the time that the loan was received. For you further information, we note that the prescribed rate in effect for the third quarter of 1989 is 12%.
We trust that you will find the foregoing satisfactory.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch