| 24(1) | 5-5916 |
| N.R. Mitchell | |
| (613) 957-2134 |
19(1)
June 7, 1988
Dear Sirs:
Re: Interest Subsidies; Subsection 80.4(1) of the Income Tax Act (the "Act")
This is in reply to your letter of April 14, 1988, concerning the operation of subsection 80.4(1) of the Act and what you regard as an unintended result of the legislation. You have asked us to consider a situation in which an employer confers a benefit on an employee by virtue of his employment by subsidizing the employee's interest costs on a "home purchase loan" pursuant to the following arrangement:
1. The contracted rate for the mortgage loan between the employee and the lending institution is 8.75%.
2. The employee pays interest a the rate of 6.75%.
3. The remaining interest cost (2%) is paid to the lender by the employer, through an arrangement agreed to at the inception of the loan.
4. The rate of interest prescribed by Regulation 4300 at the time the loan was granted is 9%.
In examining the benefit deemed to have been received by the employee as computed in subsection 80.4(1) of the Act, you have arrived at a benefit of 2.25%, rather than 2%, of the principal amount:
| Paragraph | 80.4(1)(a) : | 9% |
| 80.4(1)(b) : | 2% | |
| 80.4(1)(c) : | 8.75% | |
| 80.4(1)(d) : | Nil |
Then (a) + (b) - (c) - (d) gives 11% - 8.75% = 2.25%
In other words, this suggests a taxable benefit to the employee based on 2.25%, notwithstanding that the employer subsidy results in the employee paying an effective interest rate which is only 21 less than the market rate charged by the lender.
We would agree with your analysis of the operation of subsection 80.4(1) of the Act as set out above. We also agree that in the example given, paragraph 80.4(3)(a) of the Act does not render subsection 80.4(1) of the Act inoperative; this is a consequence of the interest subsidy paid to the lender by the employer. We can also confirm that where subsection 80.4(1) of the Act applies to a particular loan, the taxable benefit to an employee is calculated only in accordance with that subsection and is brought into income under subsection 6(9) of the Act. These specific provisions apply to the exclusion of the more general provisions paragraph 6(1)(a) or (b) of the Act. Finally, we can advise you, that the Department has no administrative practice to limit or reduce the deemed benefit stipulated by the Act in the situation which you have described. Nevertheless, we will advise the Department's Current Amendments Division of your concerns in order that this matter may be brought to the attention of the Department of Finance, which is the Department responsible for issues of tax policy.
We trust this letter will be of assistance.
Yours truly,
for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch