EMPLOYEE LOANS AND INTEREST BENEFITS
Employee loans provided by employers, whether interest-free or at a reduced interest rate, are subject to specific rules outlined by the Canada Revenue Agency (CRA). These loans often result in taxable benefits for employees, requiring proper reporting and compliance with CRA guidelines.
Employee Loans
When an employer provides a loan to an employee, the principal amount of the loan is not considered income. However, the following scenarios result in taxable benefits:
- Forgiven Loans: If an employer forgives part or all of the loan amount, the forgiven portion is considered a taxable benefit. This does not include amounts forgiven due to settlements or other legal arrangements.
- Low-Interest Loans: If the loan is offered at an interest rate below the CRA-prescribed rate, the interest benefit is taxable.
- Outstanding Loan Balance: Any unpaid portion of the loan at the end of the year is included in the employee’s income as a taxable benefit.
Interest-Free and Low-Interest Loans
Interest-free or reduced-rate loans provided by employers create a taxable benefit. The CRA requires employers to calculate the benefit based on the difference between the prescribed interest rate and the rate charged to the employee.
- Calculation of Taxable Benefit: The benefit is calculated by subtracting the actual interest paid by the employee (if any) from the amount calculated using the CRA’s prescribed rates.
- CRA Prescribed Rates: The prescribed interest rate is updated quarterly by the CRA. For example, the rate for Q1 2025 is 4%.
- Exemptions: Certain loans, such as loans under $10,000 or those used for relocation purposes, may be exempt from taxable benefits if they meet CRA conditions.
Additional Provisions for Home Purchase and Relocation Loans
Loans provided to employees for purchasing or relocating a home may be treated differently under CRA rules. To qualify as a home relocation loan, specific conditions must be met:
- The distance between the old residence and the new work location must be at least 40 kilometers greater than the distance from the new residence to the new work location.
- The loan must be used to acquire a new dwelling, either as an individual or a co-owner, or to buy shares in a co-operative housing corporation.
- The employee must designate the loan as a home relocation loan and must do so within the applicable period.
- Only one loan can be designated as a home relocation loan at a time.
Note: The home relocation loan deduction was eliminated for tax years 2018 and later, meaning the corresponding taxable benefit must now be included in income.
Reporting and Employer Obligations
- Taxable Benefits on T4 Slips: The interest benefit must be reported on the employee's T4 slip in box 14 ("Employment income") and under code 36 ("Interest-free and low-interest loans").
- Payroll Deductions: Employers must calculate and deduct appropriate amounts for taxable benefits, including income tax and Canada Pension Plan (CPP) contributions.
- Loan Repayment: If the employee repays part of the loan during the year, the taxable benefit is adjusted based on the outstanding balance.
Additional Considerations
- Interest benefits are calculated using the difference between the actual interest paid and the CRA-prescribed rate, which may vary depending on the loan’s term and use.
- Loans provided to shareholders or related parties are subject to additional scrutiny under CRA rules.
- Employees should track loan repayment schedules and ensure compliance with tax obligations to avoid penalties.
Additional Resources
