Personal Tax -> Employee loans
Employee Loans and Loan Subsidies
Income Tax Act s. 80.4, s. 110(1)(j)
A loan by an employer or a third party to an employee, or the subsidization of an employee loan, may result in a deemed taxable benefit being included in the income of the employee.
S. 80.4(1) of the Income Tax Act indicates that there may be a deemed taxable benefit to an individual or corporation when a person or partnership receives a loan or otherwise incurs a debt:
If it is reasonable to conclude that if the relationship in a or b above did not exist, then:
then the debt will be deemed to have been incurred "by virtue of the office or employment".
Mr. X is loaned $100,000 by his employer on April 1, 2008, at an interest rate of 2%. This is
not a home purchase or home relocation loan.
No principal repayments are made on the loan in 2008.
Using the prescribed interest rates, the loan interest from Apr 1 to Dec 31 would be $2,503, calculated as:
$100,000 x 4% x 91/366 + $100,000 x 92 x 3% x 92/366 + $100,000 x 3% x 92/366
Mr. X actually paid $1,503 of interest, on or before Jan 30, 2009 (within the year or 30 days thereafter), for the period Apr 1 to Dec 31 2008 (275 days), calculated as:
$100,000 x 2% x 275/366
The result is a taxable benefit in 2008 to Mr. X of $1,000 ($2,503 less $1,503).
If Mr. X did not pay the interest within 30 days of the end of 2008, then the taxable benefit would be $2,503.
If some of the interest on the loan was paid by the employer or a company related to the employer (loan subsidy), the taxable benefit to Mr. X would be increased by the amount paid.
If Mr. X reimbursed a portion of the interest paid by the employer or a company related to the employer, his taxable benefit would be reduced by the amount reimbursed.
A loan to an employee would be considered a home purchase loan if it is used to acquire or repay a debt that was incurred to acquire a dwelling, or a share of the capital stock of a cooperative housing corporation, as a residence of the employee or a person related to him. Subsequent debt incurred to repay a home purchase loan would still be considered a home purchase loan.
The loan would be considered a home relocation loan if:
Where a home purchase or home relocation loan has a term exceeding five years, at the end of five years the balance outstanding on the loan will be deemed to be a new home purchase loan. This would mean that the maximum prescribed rate will be reset to the prescribed rate that is in effect at the beginning of the sixth year.
Limit on taxable benefit from home purchase or home relocation loans
If the loan is considered a home purchase loan or a home relocation loan, then the loan interest calculated using the prescribed rates, which change quarterly, must not exceed the amount of interest calculated using the prescribed rate at the time the loan is made. This means that:
This also means that where the interest rate on an employee home purchase or home relocation loan is set at the prescribed rate in effect at the time the loan is made, which results in no taxable benefit, there will be no taxable benefit for five years, regardless of how high the prescribed interest rate goes.
The Federal 2017 Budget proposes to eliminate this deduction for benefits arising in 2018 and later taxation years.
S. 110(1)(j) of the Income Tax Act allows an individual to deduct an amount related to a deemed benefit from a home relocation loan. The amount of the deduction is the least of:
If the loan to Mr. X is a home relocation loan, then he would be able to deduct from his income the lesser of
In this case Mr. X would be allowed a deduction of $625.75 on line 248 of his tax return. When his employer completes the T4 for Mr. X, the T4 will include the following information:
Interest expense deduction re employee loans
If the proceeds of the employee loan were used to produce income from business or property, the amount of interest included as a taxable benefit can be included as part of the interest expense deduction. Examples - employee receives a loan from employer:
Loans from third parties
When a person is negotiating a loan, and the employer provides documentation to the lender to support the employee's loan application, the loan will generally be considered to have been received "by virtue of the office or employment". If the employer then subsidizes the interest costs by payment to the lender or to the employer, there will be a taxable benefit under s. 80.4 of the Income Tax Act.
When a person negotiates a loan with no involvement of the employer, the loan will not be considered to have been received "by virtue of the office or employment". If the employer subsequently subsidizes the interest costs by payment to the lender or to the employee, any benefit of the subsidization will be included in the income of the employee under s. 6(1)(a) of the Income Tax Act, instead of under s. 80.4. This would mean that there would be no home relocation loan deduction allowed.
Canada Revenue Agency resources:
Revised: March 22, 2017
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