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.
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{ 3 comments… read them below or add one }
What’s the difference between “prescribed rate” and the “actual prescribed rate” of interest that is outlined under the Home Purchase Loans section.
If I understand correctly, the current (as of Q2/2009) “prescribed rate” is 3%.
Would the “actual prescribed rate” be the interest rate of the actual employee loan (for example purposes, lets say 4% to keep numbers unique) or is it the 1% rate that CRA deems for “taxable benefits from employees and shareholders from interest-free and low-interest loans”?
Would the taxable benefit therefore be:
4% = original loan rate?
3% = prescribed rate per CRA?
1% = low interest rate for employees/shareholders
XX? = a calculated rate from above figures?
AND, if the original stated loan rate was say 0.5% (for discussion purposes), is the taxable benefit 0.5% (0.5% loan rate less 1% CRA rate)? or is it 2.5% (0.5% loan rate less 3% prescribed rate)
Thanks
The rate used is the lesser of the new prescribed rate or the rate that was in effect at the time the loan was originally granted.
Thanks Tax Guy, but that wording was used in the original article above and I was trying to get clarification of the differences in those rates to fully understand the true taxable benefit rate that’s imposed.
If, for example, a contracted loan was made to an employee at 2% on April 1, 2009. On that date, the CRA prescribed rate is 3% (or actually 1% because its an employee loan rate).
Since the loan contract rate is HIGHER than the CRA rate, there would be no benefit; correct? If the contract rate on the loan was 0.25% (for discussion purposes), then the benefit would be 0.75% on the outstanding loan amount (calculated as 1% CRA RATE less 0.25% LOAN RATE = 0.75% BENEFIT RATE).
With that said, if a loan was granted at a rate of 1%, since its the same as the 1% CRA RATE, then there would be no taxable benefits either?
Thanks again (sorry if I sound thick on this)