DEC 17 1987 Small Business and General Division R. B. Day 957-2136 RE: Employee Computer Purchase Program
We are writing in reply to your memorandum of September 24, 1987, wherein you requested our comments regarding the computation of the employee benefits to be assessed with respect to this program.
Our understanding of the facts in this case is as follows:
XXXXXXXX
From our review of the information submitted, we agree with your position that the employees eligible to purchase a computer under this program would be in receipt of a taxable benefit made up of the following components
a) a benefit computed under paragraph 6(1)(a) with respect to the discounted purchase price, and
b) a subsection 80.4(1) benefit computed with respect to, what is in effect, an interest-free loan.
Since title to the computer does not pass until all terms of the contract have been fulfilled, we would suggest that in computing the benefit, each eligible employee should be put into approximately the same after-tax position as an arm's length person who pays the full purchase price, plus financing charges, over the three year period.
We would, therefore, sugge the interest rate, prescribed by Regulation 4300(6), be applied to the XXXX cost of the hardware on the basis of a three year amortization. The employee's benefit would be computed on an annual basis as the difference between the amount he would have paid for the hardware in an arm's length transaction, and the amount actually paid by virtue of his employment with the,
For example, assuming at the XXXX hardware costs are XXXX and the prescribed rate is XXXX it would require a monthly payment of 4(1) per month for three years to pay for the computer. The taxable benefit, in 1986, for the unnamed employee would be XXXX computed as follows:
Payments required for August through December assuming arm's length transaction XXXX
1986, Payroll deduction 11 x XXXX
Total Benefit
It should be noted that, over the three year period, the proportion of taxable benefit relating to interest would decrease while the proportion relating to the discounted purchase price would increase, consistent with the amortization of the loan.
Similar computations would be made for the 1987 and subsequent taxation years.
It would, of course, be the employer's responsibility to compute the value of such benefits for each employee on a calendar year basis.
ORIGINAL SIGNED BY ORIGINAL SIGNED PAR ROBERT H. JOYCE
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch