| Minister (2)/DM's Office | Y.S. 90116008 |
| Central Records | |
| Author/Section Chief | |
| District Office | |
| Research File | |
| Taxpayer's File | |
| Return to Specialty Rulings, Room 303 Met. | |
| June 13, 1990 |
19(1)
I am writing in reply to your letter of April 5, 1990, forwarded by 19(1) concerning the use of prescribed interest rates.
I understand that, as an employee of a Canadian Chartered Bank, you benefit from a reduced mortgage rate. This benefit is subject to taxation in certain situations. You express concern that the amount of the taxable benefit resulting from the reduced mortgage rate is inflated by the use of a prescribed rate of interest rather than actual market interest rates.
The Income Tax Act provides that 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. The prescribed rate of interest for low interest or interest-free loans during a calendar quarter is defined in the Regulations to the Income Tax Act 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.
The Department does not have the authority or discretion to base your benefit on something other than the prescribed rate of interest unless the loan qualifies as a "home purchase loan" (i.e. - it was made to assist you with the purchase of a home). In the case of home purchase loans, the Income Tax Act provides a ceiling on the amount of the benefit that may be calculated in any future years. In those years, the amount of the benefit will not increase where the prescribed interest rate increases but it may be reduced where the prescribed rate decreases. l am enclosing a copy of Interpretation Bulletin IT-421R which explains the tax treatment of the loans in more detail.
I thank you for writing and I trust that this information explains the Department's position on this matter.
Yours sincerely,
Otto Jelinek
c.c. 19(1)
S. Short/jpMay 24, 1990957-2134
LC/jp (Min 44-90116008)14June 5, 1990D.M.'s Office