2015-0609071E5 Mortgage incentive

Principal Issues: Where a credit union offers a savings account with a mortgage incentive, is the incentive applied by the credit union towards a down payment on the mortgage taxable to the member?

Position: Question of fact. General comments provided.

Reasons: If the incentive does not constitute interest, it might nevertheless be taxable under subsection 9(1) or paragraph 12(1)(x) if the member receives it in the course of earning income from a business or property.

Author: Danilchenko, Elaine
Section: 3(a), 9(1), 12(1)(c), 12(1)(x)

XXXXXXXXXX                                                                                                             2015-060907
                                                                                                                                     Elaine Danilchenko
                                                                                                                                     (416) 218-5017
February 22, 2017

Dear XXXXXXXXXX:

Re:  Taxability of a bonus

This is in response to your email of September 16, 2015. We also acknowledge the subsequent correspondence dated April 1, 2016 received from XXXXXXXXXX of your office. We apologize for the delay in responding.

In your email, you asked for our views on the taxability of a bonus offered to the members of a credit union if they make deposits to a particular type of savings account that pays a flat rate of interest. To qualify for the bonus, there are other requirements that must be met and a key requirement is that the member must obtain a mortgage with the credit union. It is your view that the bonus should not be considered interest income and should not be reported on a T5 slip.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R7, Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016. We are, however, prepared to offer the following general comments, which may be of assistance.

Under paragraph 12(1)(c) of the Act, there shall be included in computing the income of a taxpayer for a taxation year as income from a business or property any amount received or receivable by the taxpayer in the year as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing the taxpayer’s income for a preceding taxation year. “Interest” is not defined in the Act; however, as indicated in Income Tax Folio S3-F6-C1, Interest Deductibility, interest is generally accepted to mean an amount that has met the following three criteria:

*     the amount must be calculated on a day-to-day accrual basis,

*     the amount must be calculated on a principal sum (or a right to a principal sum), and

*     the amount must be compensation for the use of the principal sum (or the right to the principal sum).

In the situation described, if the bonus does not meet these criteria, it likely does not constitute interest.

While the bonus may not constitute interest, it might nevertheless be taxable under other provisions of the Act, such as subsection 9(1) or paragraph 12(1)(x) of the Act.

Under subsection 9(1) of the Act, a taxpayer's income for a taxation year from a business or property is the profit from that business or property for the year, subject to the rules in Part I of the Act. Generally, the tax treatment of an amount received in the course of earning income from a business or property is determined by the application of well-accepted business principles. Where subsection 9(1) of the Act does not otherwise apply, the amount received might be included in income by virtue of paragraph 12(1)(x) of the Act.

Paragraph 12(1)(x) of the Act will generally apply to an amount received in the course of earning income from a business or property unless it was otherwise included in income, or deducted in computing any balance of undeducted outlays, expenses, or other amounts, for the year, or a preceding year, under some other provision of the Act. Therefore, where an inducement is received by a taxpayer in the course of earning income from a business or property from a person who pays the amount in the course of earning income from a business or property, such amount would be subject to paragraph 12(1)(x) of the Act.

It is a question of fact whether the bonus in your particular situation can be considered to be received by the member in the course of earning income from a business or property. However, without a detailed review of the relevant facts and documentation, we are unable to provide a definitive response.

We trust our comments will be of assistance.

Yours truly,

Jenie Leigh
Manager
Financial Institutions Section
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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