Employee loans

If an employee is provided with a loan at little or no interest, he or she must include a taxable benefit in income. As noted above (see topic 31), this benefit is generally calculated as the interest on the loan at a prescribed rate, minus any interest actually paid on the loan within the year or 30 days after year-end.

Special rules apply when you provide your employees with a low-interest or interest-free loan to assist them in buying a home when moving to work at a new location. The taxable benefit arising from such a loan may be partially or entirely offset by a special deduction. To qualify, the new residence must be at least 40 km closer than the old residence to the new work location. In general, this special deduction will entirely offset the taxable benefit arising from low-interest or interest-free loans of $25,000 or less. This deduction applies for a five-year period commencing on the date the loan is made.

Special rules also apply if you provide any of your employees with a “home purchase loan.” It is not necessary for the employee to move to a new work location to qualify under this rule. The borrowed money has to be used to either purchase or refinance the debt on the employee’s home. The benefit from such loans is calculated by applying either the prescribed rate at the time the loan is granted or the prescribed rate for the particular quarter, whichever is lower. A new base rate on the loan will be established every five years.