Employer Loans To Employees

by Tax Guy - Burlington Accountant on November 30, 2010 Print This Post Print This Post

Some employers will offer low interest or no interest loans to their employees as a benefit. However, a taxable benefit may appear on your T4 slip if you received an interest free or no-interest loan. Similarly, you are considered to have received a taxable benefit if your employer advanced you a loan and forgave all or a portion of that loan.

What is The Actual Benefit?

Generally, there are two potential benefits that can result from a loan from your employer:

First, is a benefit that results from the interest rate that is charged by your employer.

  • The interest rate benefit that is taxable is the difference between the rate you were charged by your employer and the CRA’s prescribed rate of interest (for refunds and over remittances) less 2% points (alternatively, the rate can also be expressed as 4% points less than the CRA’s rate on amounts owed to them – the end result is always the same).
  • The prescribed rates are released by the CRA quarterly.  The rates are expressed as annual amounts and must be prorated by the number of days in the quarter.
  • If the interest rate on the loan is more than the prescribed rate of interest, then there is no taxable benefit during the time the interest rate was more than the prescribed rate.

Example:  A loan of $10,000 is extended by your employer at a rate of 5% on March 15, 200X (a leap year).

The prescribed rates for 200X were:

Q1 – 7%
Q2 – 7%
Q3 – 4%
Q4 – 6%

The benefit to be included on the T4 would be:

Q1 – (0.07 – 0.05) x $10,000 x 17/365 = $9.32
Q2 – (0.07 – 0.05) x $10,000 x 91/365 = $49.86
Q3 – $0 – The loan rate was more than the prescribed rate.
Q4 – (0.06 – 0.05) x $10,000 x 92/365 = $25.21
Total taxable benefit = $84.39

Note: Home Relocation and Home Purchase Loans are calculated slightly differently.

The second form of benefit results when all or a portion of the loan is forgiven by the employer.  In this case the amount forgiven is to be included in your taxable income for the year.

Warning:  If you are a shareholder or are related to a shareholder of a company, it is possible the entire amount of the loan will be included in your income for the year unless the loan is for a specific purpose and payment is to occur within a reasonable amount of time or if the loan is to be repaid within one year and is not part of a series of back-to-back loans. 

Home Purchase Loans

A loan extended by your employer to purchase or refinance a home are subject to the same taxable benefit as regular employee loans.  However, the calculation of the benefit differs.

Unlike regular employee loans, the prescribed rate for the purposes of calculating the taxable benefit will be the lesser of the actual prescribed rate or the prescribed rate in effect at the time the loan was extended.  This “ceiling” remains in effect for the lesser of five years or the term of the loan.  If at the end of the term a balance still remains, the ceiling is re-set at the prescribed rate at that time.

Home Relocation Loans

If you employer lends you funds to relocate to a new residence that is 40 kilometres closer to your place of employment, then the ceiling described in Home Purchase Loans above applies to only 1 five year period and is not reset.  Note that both the original and new residences must have both been in Canada.

  • Home relocation loans also provide an added benefit because a deduction is available that is equal to the lesser of:
  • The taxable benefit on the loan itself,
  • The interest on $25,000 at the prescribed rate (without and payments or pre-payments applied), and
  • The total of all taxable employee loan benefits extended.

The interest benefit and the deduction are not netter together.  The full interest benefit is calculated and added to your T4 and the deduction is calculated and deducted separately.

Investment Loans and Loans to Buy an Automobile

If your employer extends you a loan of which you use the proceeds to acquire investments, the interest benefit is deductible from your investment income.

Similarly, If your employer expends you a loan to acquire an automobile to be used for business, the interest benefit in the loan becomes a taxable benefit.  However, your business use of the automobile may entitle you to a deduction of a portion of this interest benefit as an employment expense.

Suggested Reading

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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Tim Derksen March 16, 2010 at 5:13 pm

You state in this article that the rate is 2% below CRA paid out, yet your calculation example does not take this into account.

Tax Guy March 16, 2010 at 8:52 pm

The rates in the example are already adjusted. The top portion of the article explains how to arrive at the prescribed rate.

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