Taxable Benefits More Explanation & Examples

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1 Taxable Benefits More Explanation & Examples Some of UBC's housing programs for faculty and staff (employees) lead to what are called taxable benefits. Under these programs an economic benefit is provided by an employer - UBC - to its faculty or staff. Canadian income tax law provides that any assistance provided or amount paid for or on behalf of an individual, in connection with their office or employment, for the acquisition or use of a residence is a taxable employment benefit. UBC as an employer is required by law to calculate, report, withhold, and remit tax on cash and non-cash taxable benefits. The employee is solely responsible to pay any income tax on taxable employment benefits. The employee must also pay any applicable Canada Pension Plan contributions or Employment Insurance Act premiums. UBC withholds income tax from an employee s payroll. UBC then remits the tax to Canada Revenue Agency ( CRA ) for each applicable pay period, just as with normal payroll withholding. Most taxable benefits appear on the employee s paystub for each pay period during the year. At the end of the tax year, the total of all taxable benefits in respect of housing will appear on an employee s T4 in the Other Information area under Code 30. The total taxable benefit for housing will also be included in total taxable income in Box 14 of the T4. UBC has determined that taxable benefits arise on housing assistance programs, including: Restricted Resale Capped Appreciation Restricted Faculty Second Mortgage Loan Faculty-Staff Restricted Rental Mortgage Interest Assistance Down payment Assistance An employee may participate in one or more housing assistance programs. However, to participate in each program, an employee must meet the specific criteria of that program. Not all programs are available to all employees or at all UBC campuses. UBC is committed to assisting our community in obtaining affordable and high-quality housing. Employees should note that even with the cost of tax payable on taxable benefits the housing assistance programs offer good value to employees. More explanation and some examples are provided below in relation to each program. The examples below are illustrative calculations only. These examples do not describe the detailed rules and criteria of each program. These examples do not apply, and are not intended to apply, to the particular circumstances of any one employee. The example calculations contain certain assumptions. There is no guarantee that the assumptions will occur as described. Indeed, the assumptions about income and tax rates used in these illustrative examples may not apply to individual employees. Each individual s tax and financial situation will determine the tax and financial implications of any housing assistance benefit received. UBC and UBC Properties Trust are making no representation, warranty, guarantee or recommendation to any particular employee. V2.0- Rev 18 June

2 UBC urges all employees considering participation in one or more housing programs to consult their own tax and financial advisors. UBC is not providing and will not provide to employees any tax, financial or legal advice. All market values, rates of tax, interest and discount rates are illustrative only and are subject to change. Restricted Resale Capped Appreciation Faculty Home Ownership Program for Vancouver Campus Homes (please note the calculation and wording below has be updated as at June 13, 2014 and a Glossary of Terms is provided at Appendix A). In this program, an eligible faculty member will purchase a housing unit at a discount. A Benchmark Value is determined for the housing unit, which is an approximate measure of a comparable value of the unit in the unrestricted market, without reference to the specific situation of the employee and the housing unit. This Benchmark Value (or Retail Value) is then used for determining the discounted purchase price an employee pays under the terms of the Faculty Home Ownership Program (the Purchase Price ). The particular situation of an employee (given the unique restrictions applicable to occupancy and resale as well as other factors that may be relevant) may mean the value to them (the Value in Use, previously described as Employee Adjusted On Campus Market Value) of the unit is different from the Benchmark Value. Subject to such adjustments as may apply, a non-cash taxable benefit arises on the difference between the Value in Use, previously described as Employee Adjusted On Campus Market Value of the housing unit and the Purchase Price paid for the housing unit by the employee. Under applicable tax law, this difference will be a taxable benefit. On closing of the purchase of a housing unit, UBC and/or UBC Properties Trust will be required withhold and remit to CRA the estimated tax due on the taxable benefit. The employee will be contractually required to fund this remittance of the estimated tax as a part of the closing costs associated with the purchase of a housing unit Illustrative example for a buyer of a 3 bedroom plus den unit: Benchmark Value (Retail Value) 600,000 Value in Use (81.7% of Benchmark Value) (previously described as Employee Adjusted On Campus Market Value) A 490,200 Purchase Price (67% of benchmark value) B 402,000 Taxable benefit A-B 88,200 Tax due upon acquisition of the property (45.8% x 88,200) 40,396 Please refer to Appendix A for further information and a Glossary of Terms V2.0- Rev 18 June

3 Restricted Faculty Second Mortgage Loan Program Applicable to Vancouver Campus Homes For this program, a taxable benefit arises on the difference between the interest on the loan outstanding at the prescribed rate of interest and the actual interest paid. The prescribed interest rate is set by the federal government on a quarterly basis. The rate is based on the interest rate on government bonds and as a result is generally lower than commercial lending rates. The current prescribed interest rate can be found any time at the CRA s website: The prescribed interest rate that applies when a loan is first advanced is the maximum rate applicable to that loan for five years. The rate will be reset at the end of each five year period to the then current rate if the loan is still outstanding. Illustrative example: Market value 600,000 Second mortgage Loan (33% x 600,000) C 198,000 Prescribed interest rate D 1% Taxable benefit for a 12 month period C x D 1,980 Tax due per month (45.8% x 1980)/12 75 Also, under this program, if a loss arises on the sale of a unit subject to a second mortgage loan, subject to certain conditions, UBC Properties Trust will forgive a portion of the loan. The loan amount that is waived in such a scenario is regarded as a taxable benefit. It is anticipated that UBC and/or UBC Properties Trust will be required to withhold and remit to CRA the estimated tax due on the taxable benefit associated with a portion of the loan being forgiven. The employee will be contractually required to fund this withholding and remittance obligation at the time the employee repays the second mortgage. Illustrative example: Purchase price X 600,000 Sale price Y 550,000 Second mortgage Loan provided F (33% x X) 198,000 Second mortgage Loan repayable G (33% x Y) 181,500 Taxable benefit equal to portion of the Loan that is forgiven F-G 16,500 Tax due in the year of sale (16,500 x 45.8%) 7,557 V2.0- Rev 18 June

4 Restricted Faculty and Staff Rental Housing at the Vancouver Campus In the case of restricted faculty and staff rental housing, the fair market value rent on a Vancouver campus unit owned or administered by UBC may be greater than the amount of rent that an employee pays. Subject to certain adjustments that may apply, the difference between fair market value and rent paid by an employee is a non-cash taxable benefit. Illustrative example: Fair market value rent after any applicable adjustments,per month A 1,500 Actual rent paid per month B (1,250) Taxable Benefit per month A-B 250 Tax due per month 250 x 45.8% Mortgage Interest Assistance On certain third party mortgage loans, UBC will provide a direct payment of per month towards the mortgage interest paid by eligible faculty over five years, to a maximum of 50,000. Depending on the amount of the mortgage loan assumed, the employee s tax status, and the prescribed interest rate for tax purposes at the time at which the under this option is advanced, the Mortgage Interest Assistance or a portion thereof may give rise to a taxable benefit. Illustrative Example #1: Assume a mortgage of 500,000 with an interest rate of 5%, and a prescribed interest rate of 1% (values are round numbers for illustration): Total interest paid to bank in respect of mortgage A 25,000 Amount of Mortgage Interest Assistance paid by UBC B 10,000 Amount of interest paid by employee A - B = C 15,000 Interest calculated at the prescribed interest rate D 5,000 Taxable benefit (amount by which D exceeds C) - Tax due in particular year - (Continues over page) V2.0- Rev 18 June

5 Illustrative Example #2: Assume a mortgage of 500,000 with an interest rate of 2.5%, and a prescribed interest rate of 1% (values are round numbers for illustration): Total interest paid to bank in respect of mortgage A 12,500 Amount of Mortgage Interest Assistance paid by UBC B 10,000 Amount of interest paid by employee A - B = C 2,500 Interest calculated at the prescribed interest rate D 5,000 Taxable benefit (amount by which D exceeds C) 2,500 Tax due in particular year (2,500 x 45.8%) 1,145 Down Payment Assistance UBC provides an interest-free, forgivable loan of 45,000. UBC will forgive 750 of the loan balance each month, so after five years the loan will be forgiven. Any amount forgiven in a particular year will be taxable, as will the interest that would be payable at the prescribed interest rate. Illustrative Example: Assume an eligible faculty is advanced a Down Payment Assistance loan in August of a particular year: Amount of loan forgiven (@750/month for 4 months) 3,000 Interest for the year on outstanding balance at prescribed interest rate 182 Taxable benefit 3,182 Tax due in particular year (3,182 x 45.8%) 1,457 Further information on the Down Payment Assistance Program and the Mortgage Interest Assistance Program can be found at Further information on taxable benefits can be found at For questions please contact the Housing and Relocation Services Office at UBC. V2.0- Rev 18 June

6 Appendix A: Glossary of Terms TERM Benchmark Value Purchase Price Value in Use Definition Fair Market Value of a comparable housing unit available for purchase outside of the Restricted Resale Capped Appreciation Program, which is also described as Retail Value. This is the price paid by the faculty member for a housing unit before taking into account taxes and legal costs associated with the purchase This measure of housing unit value to a particular purchaser is calculated by taking a % of the Benchmark value. The % depends on the type of unit and is generally determined as follows: Unit Size: % of Benchmark: 1 bedroom 77.7% 2 bedroom 79.0% 2 bedroom + Den 79.7% 3 bedroom 80.4% 3 bedroom + Den 81.7% The Value in Use can also be described as a premium on a Purchase Price (where Purchase Price is calculated with reference to Benchmark Value) : Unit Size: Premium Factor: 1 bedroom 16% 2 bedroom 18% 2 bedroom + Den 19% 3 bedroom 20% 3 bedroom + Den 22% V2.0- Rev 18 June