| July 16, 1990 | |
| SOURCE DEDUCTIONS DIVISION | Business and General |
| Division | |
| T.D. Peters, | A. Humenuk |
| Acting Chief | 957-2135 |
| Research and Enquiries | |
| 7-900452 | |
| HAK-7544-3-0 EACC9430 |
SUBJECT: Employer Loan Interest Subsidy
We are replying to your memorandum of April 18, 1990, concerning the calculation of the taxable benefit under section 80.4 of the Income Tax Act (the Act).
24(1)
You have asked how the employee's payment to the employer should be allocated between principal and interest for the purpose of determining the taxable benefit under section 80.4 of the Act.
The employer takes the position that the portion allocated to principal is the amount determined under the actual amortization schedule whereas you are of the opinion that the employee's payment should be allocated to principal and interest based on an amortization schedule reflecting the reduced interest rate.
For the purpose of our response, we assume that the employee can be said to have received the loan by virtue of his employment not withstanding the fact that the employee negotiates the loan through a third party, based on one or more of the criteria listed in the Legislation Branch Memorandum 83-8.
It is a question of fact as to how the employee's payment is to be allocated between principal and interest which can only be determined upon reference to the actual documentation of the plan. Provided that the plan documentation indicates that the employer is only subsidizing the interest and not the principal, it is our view that the amount determined under paragraph 80.4(1)(d) of the Act, (i.e. the interest to be reimbursed by the employee to the employer) is the difference between the amount withheld from the employee's salary and the amount allocated to principal according to the actual amortization schedule used by 24(1)
Alternatively, if the documentation indicates that the employee could become entitled to a subsidy greater than the actual interest charged by the 24(1) is our view that the actual payment by the employee to the employer should be allocated according to the amortization schedule used to determine the amount of the employee's payment. In such a case, the employee would be subject to a taxable benefit under paragraph 6(1)(a) in respect of the employer's payment of principal as well as any benefit calculated under section 80.4 of the Act.
We trust our comments will be of assistance to you.
B.W. Dath Director Business and General Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch