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:
because of a previous, current or intended office or employment of
the individual, or
because of the services performed or to be performed by a corporation carrying on a
personal services business
If it is reasonable to conclude that if the relationship in a or b
above did not exist, then:
the terms of the loan or debt would have been different,
or
the loan would not have been received or the debt would not have been
incurred,
then the debt will be deemed to have been incurred "by
virtue of the office or employment".
Employee loan example:
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.
Depending on the interest rate paid by Mr. X, compared with the prescribed interest rate for employee loans, there may be a taxable benefit under s. 80.4(1) of the Income Tax Act.
The prescribed interest rates for 2008 (leap year) for employee loans were:
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.
Home purchase or home relocation loans
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:
The employee commenced employment at
a new work location in Canada,
Because of the new work location, the
employee moved
from his old residence to the new residence, which will be his
ordinary place of residence,
The loan, received by the employee or his
spouse, is used to acquire the new
residence,
The distance between the old residence and
the new work location is at least 40 km greater than the
distance between the new residence and the new work location,
and
The employee designates the loan as a home
relocation loan (an individual may not have more than one home
relocation loan at any time).
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:
if the prescribed quarterly rate increases,
the taxable benefit amount will not increase, but
if the prescribed quarterly rate decreases,
the taxable benefit amount will decrease.
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.
Home relocation loan benefit deduction
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:
the amount of the deemed taxable benefit
from the home relocation loan
the amount of the interest calculated at
prescribed rates, if the loan had been for $25,000, and
expired on the earlier of
the expiry date of the loan, and
the fifth anniversary date of the loan,
and
the amount included in income under s. 80.4
for all loans
If the loan to Mr. X is a home relocation loan,
then he would be able to deduct from his income the lesser of
the deemed taxable benefit of $1,000, and
the interest amount calculated using
prescribed rates if the loan had been for $25,000, or
$25,000/$100,000 x $2,503, or $625.75, and
all amounts included in his income for all
employee loans, or $1,000
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:
$1,000 will be included in Box 14
Employment Income, as well as Box 36 Interest-Free and Low
Interest Loans
$625.75 will be included in Box 37 Employee
Home-Relocation Loan Deduction
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:
to invest in shares of a corporation
as a home purchase loan, and a portion of
the home is used to generate rental income
which is used to acquire a motor vehicle or
aircraft that is required to be used in carrying out the
duties of an office or employment
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:
IT421R2
Benefits to individuals, corporations and shareholders from loans or
debt
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