| 922136 | |
| 24(1) | A. Humenuk |
| (613) 957-2134 |
Attention: 19(1)
October 1, 1992
Dear Sirs:
Re: Interest Free Loans to Employees Payable under a Long Term Disability Plan
We are replying to your letter of July 8, 1992 concerning the tax consequences of interest-free loans which may be granted to disabled employees under an employer's long term disability plan.
As we understand the situation you describe, an employer has an insured long term disability plan, the premiums of which are shared by the employer and the employees in a 75/25% ratio. While the contract with the insurer does not make reference to the possibility of interest-free loans, the employee booklet which describes the benefits payable under the plan states that an employee who has been approved to receive disability or dismemberment benefits under the plan may be provided with an interest free loan in order to enable the employee to purchase equipment or other services which are necessary for the successful rehabilitation of the employee.
In our conversation of September 21, 1992 (19(1)/Humenuk), you further indicated that this loan program has been set up on an informal basis. While the total value of loans outstanding is minimal in relation to the premiums paid for the policy, the loans have become an important part of the rehabilitation process. The loans are presently funded by the experience refunds held by the insurer on behalf of the employer.
You have asked whether these interest-free loans represent a taxable benefit to the disabled employees who receive them. If the answer to this question is yes, you ask whether the same result would occur if the employer had no involvement with the granting of the loan (i.e. where the loan was granted solely based on discussions between the insurer and the employee) or if the premiums for the disability plan were paid 100% by the employees. You also ask for the tax implications in respect of the employees' prior year returns if it is determined that the loans create a taxable benefit.
Subsection 80.4(1) deems an employee to have received a benefit where the employee receives a loan by virtue of employment and the amount of interest paid on the loan is less than the amount of interest computed with reference to a prescribed rate. We would comment at the outset that it is the capacity in which an individual receives the loan at the time it is made that determines whether or not it is subject to this provision.
In our view, benefits received by an employee under an insurance policy or insurance plan are not received by virtue of the individual's employment but rather are received by virtue of the contract of insurance or by virtue of rights established by the plan. Consequently, to the extent that a disabled employee's right to the loan in the circumstances described in your letter is a right established by the plan, it is our view that the loan would not give rise to a taxable benefit under section 80.4 of the Act. If, on the other hand, the granting of the loan is at the employer's discretion, the loan would be considered to be received by virtue of the individual's employment and would be taxable under subsection 6(9) of the Act. In our view a clause such as that you quoted from an employee booklet describing the entitlement to benefits under a particular plan suggests that the loan is granted at the employer's discretion and thus that the employee would be required to include the interest benefit in income. Furthermore, it would appear that the employer's right to exercise discretion on the use of the funds generated by the experience ratings suggests that the funds belong to the employer and that the loan has effectively been granted by the employer and not the insurer.
With respect to your second question, you indicated in our telephone conversation that the conditions under which an employee would be entitled to a loan would be specifically stated in the policy if it was the insurer who approved the loan. In such a case where the employee's entitlement to the loan is established by the contract of insurance, it is our view that the granting of the loan would not create a taxable benefit for the employee provided that the employer was not involved in or able to influence the granting of the loans, either by way of increased premiums to cover the loan or by any other means. Consequently we are unable to provide you with a response which would cover all such situations since it is a question of fact as to whether an employer is involved in or able to influence the granting of a particular loan.
In the third scenario you presented, the disability plan is an employee-pay-all plan and you asked whether our response would be different. In our telephone conversation you advised that the employer would be acting in a fiduciary capacity for the employees as a whole in determining whether a particular employee was entitled to a loan. In such a situation we would expect the employer's discretion as to the use of the plan's funds to be limited. Provided that the disabled employee's entitlement to the loan was clearly defined in the plan and the employer's role in granting the loan was merely fiduciary, it is our view that the employee would not be required to include a benefit in income as a result of the loan. As above however, the extent of the employer's involvement is a question of fact and a benefit would be included in income if the employer was able to exercise discretion as to who was entitled to such a loan.
With respect to your last question, an employer should prepare amended T4 supplementary slips if it is established that the T4 information slips issued for a prior year are incorrect. The employer can contact the Source Deductions Section of its local district taxation office for further details.
We caution you that these comments represent an expression of opinion on the situation as described in your letter only and, as stated in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department. Nevertheless, we hope our comments will be of assistance to you.
Yours truly,
P.D. Fuocofor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch