23 November 1999 External T.I. 9925395 - INTEREST ON STUDENT LOANS

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 interest paid on student loans that are renegotiated with financial institutions, other than through the process of Consolidation, would qualify for the tax credit in respect of interest on student loans contained in section 118.62.

Position TAKEN: No.

Reasons FOR POSITION TAKEN: Under the federal Canada Student Loans Program, students who are eligible and who have qualified under the Program for student loans would take their federal loan certificates to authorized private sector lenders which issue the loans. Contracts between the authorized lenders and the federal government are based on the principle of lender risk-sharing. In return for taking the risk associated with loans not being repaid, the government pays authorized lenders a risk premium of the face value of loans at the time of consolidation. The federal government pays the interest on the loan to the authorized lender while a student is in full-time studies. After leaving studies, borrowers must consolidate their loans made during each year of study, assume responsibility for interest and begin to make payments by the first day of the seventh month following the month the borrower's studies ended. In the 6-month period after a student completes his or her studies, he or she must go to one of the authorized lenders and fill out a Loan Repayment form that outlines the repayment agreement between the student and the authorized financial institution. The agreement will include the outstanding principal of all student loans, the interest rate and the monthly payment amount. This process is called Consolidation. Generally, a student loan made under this process (i.e, Consolidation) would be considered a loan made to, or other amount owing by, the individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level.

Once an original loan, which would be considered an eligible loan for purposes of section 118.62, is renegotiated with financial institutions, other than through the process of Consolidation, a new debt to the financial institution is created and the new loan would not be considered to be a loan made to, or other amount owing by, the individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level. The process of Consolidation is only with respect to eligible loans and should this process include the consolidation of personal loans and student loans, the new consolidated loan would not be considered to be a loan made to, or other amount owing by, the individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level.

XXXXXXXXXX 5-992539
G. Moore
November 23, 1999

Dear XXXXXXXXXX:

Re: Credit for Interest on Student Loans

This is in response to your letter of September 15, 1999, regarding section 118.62 of the Income Tax Act (the "Act").

In your letter, you describe a situation in which an individual who received a student loan under federal or provincial student financial assistance legislation has opted to renegotiate these loans into one loan owing to the bank, in order to benefit from lower interest rates. Accordingly, upon renegotiation, a new debt to the bank is created while the government loans are settled. You are enquiring whether any portion of the interest paid on the renegotiated loan would qualify for the tax credit in respect of interest on student loans.

Our Comments

The tax credit in respect of interest on student loans is contained in section 118.62 of the Act. One of the specific requirements of this provision is that the interest must have been paid "on a loan made to, or other amount owing by, the individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level". Accordingly, interest paid on loans that are not made under any of the statutes described in section 118.62 does not qualify for this tax credit.

It is our understanding that under the federal Canada Student Loans Program, students who are eligible and who have qualified under the Program for student loans would take their federal loan certificates to authorized private sector lenders which issue the loans. Contracts between the authorized lenders and the federal government are based on the principle of lender risk-sharing. In return for taking the risk associated with loans not being repaid, the government pays authorized lenders a risk premium of the face value of loans at the time of consolidation. The federal government pays the interest on the loan to the authorized lender while a student is in full-time studies. After leaving studies, borrowers must consolidate their loans made during each year of study, assume responsibility for interest and begin to make payments by the first day of the seventh month following the month the borrower's studies ended. In the 6-month period after a student completes his or her studies, he or she must go to one of the authorized lenders and fill out a Loan Repayment form that outlines the repayment agreement between the student and the authorized financial institution. The agreement will include the outstanding principal of all student loans, the interest rate and the monthly payment amount. This process is called Consolidation. We would consider that generally, a student loan made under this process (i.e., Consolidation) would be considered a loan made to, or other amount owing by, the individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level.

In your letter, it is not clear whether you are referring to loans originally meeting the requirements of section 118.62 ("eligible loans") that are subsequently renegotiated with financial institutions, other than through the process of Consolidation described above, because the interest rate or other terms of the new loans are more favourable. We wish to confirm that once an original loan, which would be considered an eligible loan for purposes of section 118.62, is renegotiated with financial institutions, other than through the process of Consolidation, a new debt to the financial institution is created and the new loan would not be considered to be a loan made to, or other amount owing by, the individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level. We also wish to confirm that the process of Consolidation is only with respect to eligible loans and should this process include the consolidation of personal loans and student loans, the new consolidated loan would not be considered to be a loan made to, or other amount owing by, the individual under the Canada Student Loans Act, the Canada Student Financial Assistance Act or a law of a province governing the granting of financial assistance to students at the post-secondary school level.

Please note that Revenue Canada does not write or amend legislation; the function of Revenue Canada is to administer and enforce the laws set out in the Act. The concerns raised in your letter relate to tax policy, which is the responsibility of the Department of Finance. Accordingly, we have forwarded a copy of your correspondence to Mr. Alan McNaughton, Director, Personal Income Tax Division, Department of Finance, so that he may be made aware of your concerns.

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Mr. Alan McNaughton

Director
Personal Income Tax Division
Department of Finance