| December 4, 1990 | |
| VANCOUVER DISTRICT OFFICE | HEAD OFFICE |
| Audit Review | Rulings Directorate |
| Section 148-13 | Financial Industries |
| Division | |
| J.C. Fitz-Clarke | D.A. Palamar |
| (613) 957-2746 |
SUBJECT: Institute of Chartered Accountants of B.C. Revenue Canada Liaison Committee Meeting
Further to your question of November 16, 1990, on "family mortgage arrangements" our answer is enclosed. If you have any further question please contact David Palamar or the undersigned.
ChiefLeasing & Financing SectionFinancial Industries DivisionRulings Directorate
Q. What do you anticipate will be the assessing policy with research to the newly introduced family mortgage program offered by Canada trust. This program allows parents to reduce their interest yield for the current market rates, and "transfer" this benefit to a home mortgage loan for their children (see write-up in the Financial Post page 18) dated September 20, 1990).
A. Our understanding is that, under this type of family mortgage arrangement, a parent purchases a guaranteed investment certificate (GIC) from a financial institution. The child who is to be assisted applies to the same financial institution for a regular residential mortgage loan. The parent agrees to accept a rate of interest of the GIC that is less than the going rate. The difference between the going rate and the rate selected by the parent will reduce the interest rate on the child on the child's mortgage.
In the Department's view, subsections 56(2) and 56(4) of the Income Tax Act would require the parent to include the amount of any "foregone" interest in his income. For example, consider a parent who purchases a $10,000 GIG under this type of arrangement, and agrees not to accept any interest on the deposit. Assuming the market rate of interest on GIC's was 12%, the Act would require the parent to include $1,200 in his income for the year, despite the fact that no interest will actually be paid to him. The arrangement would not ordinarily have any tax implications for the child.