26 April 2004 External T.I. 2004-0058061E5 - Section 80.4 Interest Benefit

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.

Principal Issues: 1. Are amounts paid by an employer for interest included in the calculation of a taxable benefit pursuant to section 80.4 deductible for the employer?

2. Is the method of calculating the section 80.4 benefit used by the correspondent correct?

Position: 1. Generally yes, if employee remuneration is otherwise deductible.

2. No.

Reasons: 1. Question of fact.

2. The method used in the spreadsheet does not follow the provision.

XXXXXXXXXX T. Young, CA
2004-005806
April 26, 2004

Dear XXXXXXXXXX:

Re: Employee Interest Benefit

We are writing in response to your email of January 16, 2004, regarding the above-noted subject. We also acknowledge our various telephone conversations (Young / XXXXXXXXXX) and your subsequent correspondence.

You asked us to confirm that an employer may deduct payments made to a third party to subsidize the interest an employee would have otherwise paid on a loan with the third party. You also asked us to verify your method of calculating the taxable benefit derived by the employee from the interest subsidy under section 80.4 of the Income Tax Act (the "Act").

Our Comments

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 ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. However, we are prepared to provide the following general comments, which may be of assistance to you.

In general terms, an employer can deduct payments made to a third party to subsidize the interest an employee would have otherwise paid on a loan from the third party. In terms of the taxable status of the interest subsidy for the employee, as we discussed, the employee may be in receipt of a taxable benefit by virtue of either section 80.4 or paragraph 6(1)(a) of the Act. Section 80.4 may apply, for example, where the loan would not have otherwise been received by the employee but for his or her office or employment. Where section 80.4 does not apply, the employee is nevertheless in receipt of a taxable benefit under paragraph 6(1)(a) for the full amount of the interest subsidy.

On the basis that section 80.4 of the Act is the appropriate provision to calculate the taxable benefit in the scenarios you described, we note that the method you used does not match the method set out in that provision. For more information on the application of section 80.4, refer to interpretation bulletin IT-421R2, Benefits to Individuals, Corporations and Shareholders from Loans or Debt.

The documents referred to above may be found on our web site at www.cra.gc.ca. We trust our comments will be of assistance to you.

Yours truly,

Randy Hewlett, B. Comm.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch