Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: The income tax implications for employees who relocate and receive a low-interest mortgage by virtue of their employment
Position: Taxable benefit arises under subsection 80.4(1) of the Act. If the loan is a home relocation loan, the employee may be entitled to a deduction under paragraph 110(1)(j) of the Act for a portion of the interest.
Reasons: Application of the provisions in section 80.4 of the Act and paragraph 110(1)(j).
Randy Hewlett, B.Comm.
XXXXXXXXXX 613-957-8973
2003-001892
June 13, 2003
Dear XXXXXXXXXX:
Re: Employee Home Relocation and Purchase Loans
We are writing in response to your letter of May 15, 2003, wherein you requested our opinion on the income tax implications for employees of XXXXXXXXXX (the "Employer") who relocate and receive home relocation or purchase loans.
Our understanding of the facts is as follows:
? The Employer has contracted with XXXXXXXXXX ("ACO") to provide relocation services to employees that are moving by virtue of their employment.
? ACO administers the XXXXXXXXXX (the "Relocation Policy"), under which relocating employees are reimbursed expenses incurred in respect of an employment-related move.
? ACO has further contracted with the XXXXXXXXXX ("BCO") to provide residential mortgage services to the relocating employees, including arranging low-interest residential mortgages through the financial institutions for which BCO brokers residential mortgages.
? From a pool of money available under the Relocation Policy, a relocating employee can opt to have ACO pay an amount to a financial institution so that a lower-than-normal residential mortgage interest rate can be obtained for the mortgage on the residence located at the new employment location.
? One of the financial institutions for which BCO brokers residential mortgages is currently advising BCO and relocating employees that depending on the amount of the subsidy, it can arrange residential mortgages at a rate that is lower than the "prescribed rate" without tax implications to the employees under the Income Tax Act (the "Act").
? For example, the financial institution is of the view that there are no income tax implications for the relocating employee in the following examples:
o A home relocation loan or home purchase loan is received in the amount of $100,000 and a mortgage is written that has an interest rate of 2.25%, which is a blended rate determined on the basis of $25,000 borrowed at 0% interest and $75,000 borrowed at 3% interest.
o A home relocation loan or home purchase loan is received in the amount of $50,000 and a mortgage is written that has an interest rate of 1.50%, which is a blended rate determined on the basis of $25,000 borrowed at 0% interest and $25,000 borrowed at 3% interest.
In view of the particular provisions in the Act that deal with employee home purchase and relocation loans, you asked for our views on the income tax implications.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we offer the following comments.
Interpretation Bulletin IT-421R2, Benefits to Individuals, Corporations and Shareholders from Loans or Debt, discusses the taxation of employment benefits arising from certain interest-free or low-interest loans or debts. Generally, the interest benefit calculated under subsection 80.4(1) of the Act on a loan received by an employee is the amount, if any, by which the interest on the loan computed at the prescribed rate for the period in the year during which it was outstanding, exceeds the amount of interest paid on the loan for the year. The bulletin also explains the special rules that apply to a home relocation loan and a home purchase loan. For purposes of this letter, we have assumed that the loan in question is received by virtue of an individual's office or employment, and therefore, subsection 80.4(1) of the Act applies.
Subsection 80.4(4) of the Act establishes a ceiling on the amount of the benefit applicable to a home purchase loan and a home relocation loan. This provision provides that the interest calculated on such a loan under paragraph 80.4(1)(a) of the Act must not exceed the amount determined by using the prescribed rate of interest in effect at the time the loan was received. The interest rate is fixed for periods of up to five years. However, if the prescribed rate later decreases below the prescribed rate in effect at the time the loan was received, the employee is given the benefit of the lower rate. If the loan has a repayment term exceeding five years, subsection 80.4(6) of the Act provides that any balance outstanding is deemed to be a new home purchase loan received on the date that is five years from the day on which the loan was received and on each five-year anniversary thereafter while the loan is outstanding.
The term home purchase loan is defined in subsection 80.4(7) of the Act. A home purchase loan is a loan that is received by an employee in the circumstances described in subsection 80.4(1) of the Act, if it is used to acquire a dwelling (or to repay a loan that was received or incurred to acquire a dwelling) or a share of the capital stock of a cooperative housing corporation acquired for the sole purpose of acquiring the right to inhabit a dwelling owned by the corporation. Further, the dwelling must be used for the habitation of the employee or a person related to the employee.
The term home relocation loan is defined in subsection 248(1) of the Act. A home relocation loan is a loan that is received by an employee (or spouse or common-law partner) in circumstances where employment is commenced at a location in Canada ("new work location"), and by reason of the employment at the new work location, the employee has moved from a residence in Canada at which, before the move, he or she ordinarily resided ("old residence") to a residence in Canada at which, after the move, he or she ordinarily resided ("new residence"). Further,
(a) The distance between the old residence and the new work location must be at least 40 kilometres greater than the distance between the new residence and the new work location.
(b) The loan must be used to acquire a dwelling, or a share of the capital stock of a cooperative housing corporation acquired for the sole purpose of acquiring the right to inhabit a dwelling owned by the corporation, where the dwelling is for the habitation of the employee and is the employee's new residence.
(c) The loan is received in the circumstances described in subsection 80.4(1) of the Act, or would have been so received if subsection 80.4(1.1) had applied to the loan at the time it was received.
(d) The loan is designated by the employee to be a home relocation loan, but in no case shall more than one loan in respect of a particular move, or more than one loan at any particular time, be designated as a home relocation loan by the employee.
An employee who has received a home relocation loan may deduct an amount determined under paragraph 110(1)(j) of the Act in computing taxable income. The amount that may be deducted is the least of
(a) The amount that would have been included in income under section 80.4 of the Act in the year if that section had applied only in respect of the home relocation loan.
(b) The amount of interest for the year that would have been computed under paragraph 80.4(1)(a) of the Act if the home relocation loan had been $25,000 and expired on the earlier of
(i) The date on which the home relocation loan expired; and
(ii) The fifth anniversary of the day on which the home relocation loan was made.
(c) The amount included in income under section 80.4 of the Act in the year.
In the examples described in your letter, if the prescribed rate of interest in effect at the time the mortgage was written is 3%, it is our opinion that the employee is in receipt of a taxable benefit pursuant to subsection 80.4(1) of the Act. Assuming that the mortgage was outstanding for a full year, the benefit in the first example would be $750 [($100,000 x 3%)-($100,000 x 2.25%)]. The benefit in the second example is also $750 [($50,000 x 3%)-($50,000 x 1.5%)]. The employee would only be entitled to a deduction under paragraph 110(1)(j) of the Act if the loan met the definition of a home relocation loan. The deduction would be $750 in each example (calculated as the lesser of the amounts determined under (a) to (c) in the preceding paragraph: (a) $750, (b) $25,000 x 3% = $750, and (c) $750).
It should be noted that, contrary to the financial institution's assessment of the tax implications, the employee would not be entitled to a deduction under paragraph 110(1)(j) of the Act if either of these loans were a home purchase loan. Further, even though the impact on the employee's taxable income was nil in these examples where the loan is a home relocation loan, there is an increase in the employee's net income before calculating taxable income, that will impact other calculations under the Act (e.g. earned income and entitlement to certain tax credits).
Finally, it should also be noted that for information reporting purposes, the Act requires that the employer include the interest benefit determined under section 80.4 in "Employment Income" on the employee's T4 (box 14) and also show it separately in the "Other Information" area of the T4 using Code 36. If applicable, the amount of the deduction available under paragraph 110(1)(j) of the Act for a home relocation loan is also shown in the "Other Information" area of the T4 using Code 37.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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