| 19(1) | File No. 5-9348 |
| J.D. Jones | |
| (613) 957-2104 |
January 25, 1990
Dear Sirs:
Re: Subsidized Mortgages Section 80.4 of the Income Tax Act (the "Act")
This is in reply to your letter of December 21, l989 wherein you requested our confirmation of your understanding of the calculation of the benefit deemed to have been received by employees pursuant to section 80 4 of the Act in the following situations.
Two taxpayers, both employed by different employers, enter jointly into a mortgage with 24(1) Each employer operates a subsidized mortgage program administered by 24(1) Each employer has an agreement with 24(1) which we are assuming satisfies the provisions of section 80.4 of the Act such that the employees will receive the loan by virtue of their office or employment. It is also assumed that the employees apply jointly for the mortgage in a manner which satisfies section 80.4 of the Act.
Each employer provides a 1% interest subsidy on the full mortgage ($100,000). The rate of interest prescribed by Regulation 4300 at the time the loan was granted is 11% and the contract mortgage interest rate is 12%. The contract mortgage interest rate is the "regular" mortgage interest rate charged to non-subsidized mortgages.
Example #1
You propose to calculate the taxable benefit pursuant to section 80.4 of the Act for each of the two taxpayers as follows:
(i) (Prescribed Interest) + (Subsidy Interest) - (Total of Actual Interest Paid by Both Employer and Employee) = Total Taxable Benefit
11% + (1% + 1%) - 12% = 1%
(ii) The net taxable benefit is 1% for the two employees combined.
(iii) Since each employer contributed an equal amount of subsidy, the combined taxable benefit of 1% will be split proportionately. That is, taxpayer A will claim .5% and taxpayer A will also claim .5%.
Example #2
In the event that the two employers contribute different amounts of subsidy (e.g. Employer A contributes 1% and Employer B contributes 2%), the following calculations, in your view, will apply:
(i) (Prescribed Interest) + (Subsidy Interest) - (Total of Actual Interest Paid by Both Employer and Employee) = Total Taxable Benefit
11% + (1% + 2%) - 12% = 2%
(ii) The net taxable benefit is 2% for the two employees combined.
(iii) However, since each employer contributed an unequal amount of subsidy the total taxable benefit will be prorated in the following manner:
a) Employer A share of total subsidy 1/3
b) Employer B share of total subsidy 2/3
c) Therefore, in your view, the employee of Employer A will include in income a benefit of 1/3 of 2% . The employee of employer B will include in income a benefit of 2/3 of 2%.
Our Comments
As stated in Interpretation Bulletin IT-42lR, subsection 80.4(1) of the Act deems a benefit, in the above two examples, to have been received by an individual if, by virtue of the present office or employment of that individual any person receives a loan or otherwise incurs a debt. The benefit is the amount by which the aggregate of interest for the year on the loan or debt calculated at a prescribed rate plus any interest paid or payable thereon by the individual's employer or a person related thereto exceeds all interest for the year paid on such loans or debts not later than 30 days after the end of the year. Accordingly, it is our view that the calculation of the benefit pursuant to section 80.4 of the Act in the above two examples would be as follows:
Example #1
Paragraph 80.4(1)(a): 11% 80.4(1)(b): 1% 80.4(1)(c): 12% 80.4(1)(d): nil
Then (a) + (b) - (c) - (d) = 12% - 12% = nil
Accordingly, each of the two taxpayers in this example would not be assessed a taxable benefit as the above calculation would apply equally to each of them (provided the two employers are not related to each other.)
Example #2
Employee of Employer A
Paragraph 80.4(1)(a): 11% 80.4(1)(b): 1% 80.4(1)(c): 12% 80.4(1)(d): nil
Then (a) + (b) - (c) - (d) = 12% - 12% = nil
Employee of Employer B
Paragraph 80.4(1)(a): 11% 80.4(1)(b): 2% 80.4(1)(c): 12% 80.4(1)(d): nil
Then (a) + (b) - (c) - (d) = 13% - 12% = 1%
Accordingly, the employee of Employer A is not assessed a taxable benefit while the employee of Employer 8 will be assessed a taxable benefit based on 1% provided the two employers are not related to each other.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch