R. Nanner (613) 957-8960
October 24, 1986
Dear Sirs:
Re: Taxable benefit, low interest loans
This is in response to your letter dated August 25, 1985 wherein you asked for our opinion as to whether the provisions of subsection 80.4(1) of the Income Tax Act (the `Act') apply in the following situations.
XXXX lends to its employees money at a reduced rate of interest to enable them to acquire a home for their personal occupation. Such loans are approved by the Personnel Department of the Bank and are subject to specific documentation which establishes contractually the provision of the low-interest-rate loan.
From time to time, employees require funds in excess of their low interest loan limit to acquire their home. The Bank has no special policy with respect to the lending of such excess funds and the employee to free to negotiate a mortgage loan with the financial institution of his choice.
Should the employee choose to borrow the funds from the Bank, then the loan is subject to all the same teams and conditions as are applicable to any third party borrower. The Personnel department of the Bank does not approve such loans and has no involvement in their being granted. In particular, the employee will be charged the same interest rate for the term chosen as is offered to the general public by the Bank. The documentation is the standard contract used by all other customers of the Bank.
From the various mortgage options available, employees normally choose the "closed" option because (a) it carries a rate of interest which is 1/2% over the the "open" option and (b) as a concession to its employees, the Bank will allow, under certain conditions early repayment of principal amounts of mortgage loans owed by an employee. The Bank does not charge any amount to an employee for this privilege. This concession is revocable at any time by the Bank and is not considered by the Bank to be a contractual obligation of the Bank with respect either to the person's employment with the Bank or any mortgage loan he might otherwise have with the Bank.
You have also indicated that the interest rate charged on such loans is less than the interest rate that the Bank would otherwise charge given the repayment concession.
Opinions:
Based on the above-mentioned facts, we agree with our opinion that the excess residential loans are received by virtue of the office or employment of the Bank employees and as such, are subject to the provisions of subsection 80.4(1) of the Act. We also agree with your opinion that subsection 80.4(3) of the Act does not apply in this situation.
We would like to point out that a taxable benefit from employment under paragraph 6(1)(a) of the Act may arise at the time the Bank waives the prepayment penalty on a prepayment by an employee.
The view expressed above with respect to the situation which you have described in general terms constitute an opinion and as such, is not binding on the Department.
We hope our comments are of assistance to you.
Yours truly,
F. Lee Workman
for Director Financial Industries Division Rulings Directorate Legislation and Intergovernmental Affairs Branch