17 November 1999 External T.I. 9922605 - SETTLED LOAN

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether paragraph 6(1)(a) and subsection 6(15) of the Income Tax Act would apply to the part of an interest free loan received while employed that is forgiven by the taxpayer's former employer.

Would the provisions apply if, instead of a discount to induce repayment of the loan, the former employer would prepay the employee's interest costs in obtaining a loan to repay the employer?

POSITION: The provisions would apply so that the taxpayer would receive a taxable benefit.

Reasons: Subsection 6(15) provides, for purposes of paragraph 6(1)(a), for a deemed benefit at a specified value where an obligation issued by the taxpayer is settled or extinguished. Under paragraph 6(1)(a), the benefit is included in computing a taxpayer's employment income if the benefit is received or enjoyed in respect of, in the course of or by virtue of an office or employment. The deemed benefit stems from the extinguishment or settlement of an interest free loan received while an employee of the lender. It would be difficult to envisage a situation where such a loan would not have been received by the taxpayer "in respect of, in the course of, or by virtue of an office or employment".

We would take a close look at a particular transaction to ensure that the prepayment of the taxpayer's interest by the former employer on a replacement loan taken out by the taxpayer is not a disguised discount given to the taxpayer to induce the taxpayer to repay the loan the loan to the former employer

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XXXXXXXXXX 992260
J. E. Grisé
Attention: XXXXXXXXXX

November 17, 1999

Dear Sirs:

Re: Paragraph 6(1)(a) and subsection 6(15) of the Income Tax Act (the Act)

This is in reply to your letter of August 1, 1999, requesting our views on the application of the above provisions to certain situations involving former employees of a vendor.

For the purposes of this inquiry, you ask that we make the following assumptions:

1. A lender ("Lender") has made a term interest free loan to a borrower ("Borrower").

2. At the time of the loan, the Lender was the employer of the Borrower.

3. No taxable benefits in respect of the loan applied at the time of the loan.

4. The loan was made prior to February 23, 1998 and so is unaffected by later amendments.

5. The Lender has terminated the employment of the Borrower a considerable period of time ago. All termination issues have been resolved and there is no continuing relationship.

6. The Lender has a need to gather in its assets.

7. The Lender and borrower act at arm's length.

8. Any discount described below would simply be the result of current interest rates and arm's length bargaining.

9. The Lender is not credit worthy.

You would like us to consider the following potential scenarios:

• The Lender would induce the Borrower to repay the loan by offering a discount.
• The Lender would induce the Borrower to repay the loan without a discount by paying, at the time of payment, the interest payable on a replacement loan taken out by the Borrower to fund the repayment.

In the first scenario, subsection 6(15) of the Act would apply, for purposes of paragraph 6(1)(a) of the Act, to deem a benefit to have been enjoyed by the Borrower. In our view, the benefit from the settlement of the loan will be in respect of the Borrower's office or employment if the loan was received in respect of Borrower's office or employment. It is difficult to envisage a situation where a non-interest bearing loan would not be received in respect of an office or employment where it is received by an employee from the employee's arm's length employer.

In our view, the second scenario could result in a deemed benefit pursuant to subsection 6(15) of the Act if the particular fact situation reveals that the Borrower's loan has been settled or extinguished and the prepayment of interest by the Lender is tantamount to a discount on the loan to induce the Borrower to repay the loan.

We hope our comments are helpful.

Yours truly,

John Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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