Employee Loans

by Tax Guy - Burlington Accountant on November 29, 2010 Print This Post Print This Post

If your employer agrees to lend you money a taxable benefit may be included on your T4 slip if the loan is low or interest free or if the loan or a portion of the loan is forgiven by your employer.

What is the Benefit?

A taxable benefit on the loan will arise if the rate charged on the loan is less than the CRAs prescribed rate of interest for remittances and overpayments less two percentage points. For example, if you received a loan from your employer and was charged 1% and the CRAs prescribed rate of interest for remittances and overpayments and overpayments was 5%, then the taxable benefit would be 2%.

The prescribed interest rates are established quarterly and the benefit is to be prorated to the number of days on the calendar quarter.

If your employer forgives a portion of your loan in any given year, that portion forgiven is to be added to your employment income as a taxable benefit for that year.

Home Relocation and Home Purchase Loans are treated slightly differently.

Home Purchase Loans

When a loan is granted to purchase a home or refinance an existing home the benefit is calculated exact the same as a standard employee loan outlined above except that the prescribed rate used for calculating the benefit will be the lesser of the actual prescribed rate or the prescribed rate at the time the loan was granted. Thus there is a ceiling that caps the taxable benefit at the rate in effect at the time the loan was granted.

This ceiling re-sets after five years at which time the ceiling is re-calculated using the proscribed rate in effect at the fifth year anniversary.

Home Relocation Loans

If you move more than 40 kilometres closer to your place of employment and your employer extends you a loan to help you with he move, the ceiling described above will only apply for the first year and is not re-set after. There is also an additional benefit associated with the relocation because there is also a deduction available that is equal to the lesser of:

  • the taxable benefit on the loan itself,
  • interest on $25,000 at the prescribed rate (without and payments or pre-payments applied), and
  • the total of all the taxable employee loan benefits extended.

Note that the deductions cannot be deducted from the interest benefit (netted together) and the full interest benefit is added to your T4 and your deduction is calculated an claimed separately.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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