Loans and employee debt
Content has been updated for clarity, completeness and plain language.
The changes identified by the tags are effective January 1, 2023 and are identified with New CRA administrative policy.
Generally, if a low-interest or interest-free loan is provided or a debt is incurred because of employment or shareholdings, the interest benefit is taxable. Depending on your situation, the interest benefit may not be taxable under the CRA's administrative policy .
Forgiven loans you provide to your employees or a shareholder are always taxable.
On this page
Steps
Determine if the benefit was received from the loan or debt
You need to determine if the benefit was received from the loan or debt.
Type of loans or debt
Loans received because of employment
A loan is considered received because of employment if it is reasonable to conclude that the loan would not have been received, or the terms of the loan would have been different, had there been no current, previous, or intended employment.
Where loans are received because of employment, continue to Step 2 – Determine if an interest benefit received from the loan must be calculated.
Loans received for a home purchase or home relocation
Home purchase loan
A home purchase loan is any part of a loan to an employee that the employee used to get or repay another loan to buy a residence. The residence has to be for that employee, or a person related to that employee. This also applies to a shareholder, or a person related to a shareholder.
Home relocation loan
Only a debt that is a loan can be a home relocation loan. A home relocation loan is a loan received by an employee or an employee's spouse or common-law partner that meets all of the following conditions:
- Your employee moves to start work at a new location in Canada
- Your employee or your employee's spouse or common-law partner uses the loan to buy a new residence that is at least 40 kilometres closer to the new work location than the previous home
- Your employee or your employee's spouse or common-law partner receives the loan because of the employee's employment
- Your employee designates the loan as a home relocation loan
- The loan is used to acquire a residence or a share of the capital stock of a co-operative housing corporation acquired only to obtain the right to inhabit a residence owned by the corporation. The residence must be for the habitation of the employee and be their new residence
Where home purchase or home relocation loans are received, continue to Step 2 – Determine if an interest benefit received from the loan must be calculated.
Loans received because of shareholdings
Where a person or partnership receives a loan or incurs a debt because of shareholdings, continue to Step 2 – Determine if an interest benefit received from the loan must be calculated.
Payroll advances you provide related to employment
If you make a payroll advance to your employee on account of their future earnings, the advance is generally not considered to be a loan for the purposes of subsection 80.4(1) of the Income Tax Act.
An advance on account of future earnings is a payment for salary, wages or commissions that an employee is expected to earn by the performance of future services. Such advances are generally considered to be employment income in the year they are received.
Loans you provide that are equivalent to an anticipated workers' compensation award
To determine if advances or loans made to an employee, that are equivalent to an anticipated workers' compensation award, are a taxable benefit, refer to Payments related to workers' compensation claims.
Loans or debts that are forgiven
A forgiven loan is where all or part of an existing loan or debt has been forgiven. The amount that has been forgiven in the tax year is considered to be income for that tax year.
The CRA's administrative policy does not apply to forgiven loans or debts. The amount forgiven is always taxable.
Forgivable loans
Forgivable loans are types of loans that allow borrowers to have the balance of the loan partially or totally forgiven if they meet certain conditions.
Received because of employment
Forgivable loans received because of employment that are subsequently forgiven are considered to be employment income at the time they were forgiven. If a loan is partially forgiven, only the forgiven portion is included in their income
Received because of shareholdings
Forgivable loans received because of shareholdings that are subsequently forgiven are not considered to be employment income even though the shareholder is also an employee at the time the loan was forgiven. Instead, the forgiven amount is considered as income received by the person in their capacity as a shareholder
Forgivable loans specific to pursuing education or research
If you provide an employee with a forgivable loan to enable them to pursue education or research on the condition that they return to employment with you, the amount is generally not included in their income at the time they receive it. If the loan (or part of the loan) is later forgiven for the reason that the employment conditions were met, the forgiven part would be included as employment income in the year it was forgiven.
Learn more: Income Tax Folio S1-F2-C3, Scholarships, Research Grants and Other Education Assistance.
Repayable award
Repayable awards are different from forgivable loans. If you provide your employee with a repayable award which is not for education or training that is primarily for the benefit of the employer, the amount is considered employment income and must be included on the T4 slip in the year received.
- If the loan was outstanding for any part of the year, continue to Step 2 – Determine if an interest benefit received from the loan must be calculated.
- If the benefit is received from forgiving the loan principal, continue to Step 4 – Calculate: Forgiven loans or employee debt.
Determine if the interest benefit received from the loan must be calculated
If the loan is received or the debt is incurred because of employment or shareholdings, you do not need to calculate the interest benefit if one of the following exceptions applies:
The interest rate on the loan or debt equals, or is more than, the rate that would have been agreed upon in an arm's length transaction at the time the loan or debt arose if the creditor's ordinary business included the lending of money. This exception does not apply if someone other than the borrower pays any part of the interest from the loan or debt
You include all or part of the loan or debt in the income of a person or partnership. Where only part of the loan or debt has been included in income, an interest benefit must still be calculated for the portion of the loan or debt that remains outstanding
These exceptions also apply to a loan deemed to have been made under a back-to-back shareholder loan arrangement.
- If one of the above exceptions applies, you do not need to do any calculations. Do not continue to next step
- If the above exceptions do not apply, continue to Step 3 – Determine if the interest benefit is taxable
Determine if the interest benefit is taxable New CRA administrative policy
Non-taxable situation
If the loan is received or the debt is incurred because of employment , the interest benefit is not taxable if all of the following apply:
- Total amount of all loans received is $10,000 or less per calendar year (includes loans of different term durations and principal amounts)
- Term of the loan(s) is 60 days or less
- Loan is not received because of shareholdings
If the term of the loan spans 2 calendar years, the loan will count as part of the $10,000 limit for the year in which the loan was received.
If the loan is considered received because of shareholdings, the CRA administrative policy does not apply.
Taxable situation
If the loan does not meet all of the conditions above, the interest benefit is taxable.
If the full principal of the loan is not repaid within 60 days, the full interest benefit received by the employee is taxable. You will need to report this amount on a T4 slip in the year the loan is received.
- If the interest benefit is not taxable, you do not need to do any calculations. Do not continue to next step
- If the interest benefit is taxable, continue to Step 4 – Calculate the value of the benefit
Calculate the value of the benefit
If the benefit is taxable, the calculation of the benefit will depend on the type of loan or debt received. You must use the correct prescribed interest rates for each quarter. There are different rates for each quarter.
Situations
Calculate: Interest benefit for employees
Once you have determined that a loan or debt is considered received because of employment , the interest benefit is calculated in the tax year as follows:
- Interest calculated at the prescribed interest rates for each quarter during the period in the year the loan was outstanding (Principal balance X % prescribed rates X #days/365 days)
- plus Total of all interest paid or payable in the year on the loan by the employer (or intended employer) and any other person (other than the debtor) related to the employer
- equals Subtotal
- minus Total of all interest paid for the year (by any person) on the loan not later than 30 days after the end of the year
- minus Any portion of the interest paid or payable in the year on the loan by the employer (or the intended employer) and any other person (other than the debtor) related to the employer which is reimbursed in the year or within 30 days after the end of the year by the debtor to the person or entity that paid it
- equals Value of the interest benefit to be included on the T4 slip in code 36 and in box 14
If interest was paid by the employer (or intended employer) or any other person (other than the debtor) related to the employer which has not been reimbursed in the year, you need to report this amount in code 40 and in box 14.
The loan does not need to be outstanding at the end of the borrower’s tax year for a benefit to be calculated. If the employee makes a payment during the period, then two separate calculations are required for the period. Each calculation is based on the declining balance of the loan as payments are made.
Example – Calculations
On March 4, 20X1, Steve borrowed $250,000 from his employer as a low interest loan at a 1% interest rate. In 20X1, the prescribed interest rates were: 3% for 1st quarter, 3% for 2nd quarter, 4% for 3rd quarter and 5% for 4th quarter.
Steve made a payment on principal balance of $25,000 on August 1, 20X1.
A company related to the employer (3rd party) paid $2,000 in interest on Steve's loan on December 1, 20X1. Steve repaid $750 of this amount during the year.
Steve made an interest payment of $1,900 on January 15, 20X2 (within 30 days after the end of the year).
Calculations
- $575.34 is the calculated interest for quarter 1 ($250,000 principal balance X 3% prescribed rate X 28 days/365 days)
- plus $1,869.86 is the calculated interest for quarter 2 ($250,000 principal balance X 3% prescribed rate X 91 days/365 days)
- plus $876.71 is the calculated interest for quarter 3 before payment ($250,000 principal balance X 4% prescribed rate X 32 days/365 days)
- plus $1,479.45 is the calculated interest for quarter 3 after payment ($225,000 ($250,000 - $25,000) principal balance X 4% prescribed rate X 60 days/365 days)
- plus $2,835.62 is the calculated interest for quarter 4 ($225,000 principal balance X 5% prescribed rate X 92 days/365 days)
- equals $7,636.99 is the total of the calculated interest for all quarters
- plus $2,000 is the amount paid by a 3rd party (company related to the employer) in interest on Steve's loan
- equals $9,636.99 is the subtotal
- minus $3,900 is the amount of interest paid for the year on Steve’s loan not later than 30 days after the end of the year ($1,900 is the amount Steve paid in interest to his employer (within 30 days after the end of the year) + $2,000 in interest paid by a 3rd party (company related to the employer) on Steve’s loan)
- minus $750 is the amount of interest paid on the loan by the 3rd party company related to the employer that Steve reimbursed in the year or within 30 days after the end of the year
- equals $4,986.99 is the value of the benefit to be included on the T4 slip in code 36 and in box 14
- equals $1,250 ($2,000 - $750) is the value of the benefit to be included on the T4 slip in code 40 and in box 14
Calculate: Interest benefit on a home purchase or home relocation loan
Once you have determined the loan received is a home purchase loan or home relocation loan , the interest benefit is calculated with the same formula as for the interest benefit for employees with the following limitations:
- The amount of interest calculated as a taxable benefit should not be more than the interest that would have been charged at the prescribed rate in effect when the loan or debt was established
- The prescribed rate is set as a ceiling at the time the loan or debt was established, but may decrease if the prevailing prescribed rate falls
- If the term of repayment for the loan is more than 5 years, the balance owing at the end of five years (from the day the loan was made) is considered a new loan. Treat the outstanding balance as a new loan on that date.
The interest benefit is calculated in the tax year as follows:
- Interest calculated at the prescribed interest rates established for the loan (or the current prescribed interest rate for the quarter if that should be lower) for each quarter during the period in the year that the home purchase or home relocation loan was outstanding (Principal balance X % prescribed rates X #days/365 days)
- plus Total of all interest paid or payable in the year on the loan by the employer (or intended employer) and any other person (other than the debtor) related to the employer
- equals Subtotal
- minus Total of all interest paid for the year (by any person) on the loan not later than 30 days after the end of the year
- minus Any portion of the interest paid or payable in the year on the loan by the employer (or the intended employer) and any other person (other than the debtor) related to the employer which is reimbursed in the year or within 30 days after the end of the year by the debtor to the person or entity that paid it
- equals Value of the interest benefit to be included on the T4 slip in code 36 and in box 14
If interest was paid by the employer (or intended employer) and any other person (other than the debtor) related to the employer which has not been reimbursed in the year, you need to report this amount in code 40 and in box 14.
The loan does not need to be outstanding at the end of the borrower’s tax year for a benefit to be calculated. If the employee makes a payment during the period, then two separate calculations are required for the period. Each calculation is based on the declining balance of the loan as payments are made.
Example – Calculations
On January 1, 20X1, Judith borrowed $100,000 from her employer. This was to purchase a condo which will be Judith's personal residence and for this example, the loan qualifies as a home relocation loan. The loan is repayable in 25 years and the term is 6 years with an interest rate of 2%. The prescribed interest rates were: 3% for 20X1, 3% for 20X2, 1% for 20X3, 3% for 20X4, 3% for 20X5 and 4% for 20X6.
Judith made interest payments of $2,000 in 20X1, $2,000 in 20X2 and $1,800 in 20X3, each on December 30 of the respective year. Judith also made a payment on principal balance of $10,000 on January 1, 20X3.
Judith made interest payments of $1,600 in 20X4, $1,400 in 20X5 and $1,000 in 20X6, each on December 30 of the respective year. Judith also made payments on principal balance of $10,000 on January 1, 20X4, $10,000 on January 1, 20X5 and $20,000 on January 1, 20X6.
The prescribed interest rates did not change from quarter to quarter during these tax years. No interest payments were made by the employer or any party related to the employer.
Calculations for 20X1 tax year
- $3,000 is the calculated interest for 20X1 tax year ($100,000 principal balance X 3% prescribed rate X 365 days/365 days)
- minus $2,000 is the amount Judith paid in interest to her employer
- equals $1,000 is the value of the benefit to be included on the T4 slip in code 36 and in box 14 for 20X1 tax year
Calculations for 20X2 tax year
- $3,000 is the calculated interest for 20X2 tax year ($100,000 principal balance X 3% prescribed rate X 365 days/365 days)
- minus $2,000 is the amount Judith paid in interest to her employer
- equals $1,000 is the value of the benefit to be included on the T4 slip in code 36 and in box 14 for 20X2 tax year
Calculations for 20X3 tax year
- $900 is the calculated interest for 20X3 tax year ($90,000 ($100,000 - $10,000) principal balance X 1% prescribed rate (at the lower rate for that year for the first five years) X 365 days/365 days)
- minus $1,800 is the amount Judith paid in interest to her employer
- equals $0 is the value of the benefit to be included on the T4 slip in code 36 and in box 14 for 20X3 tax year
Calculations for 20X4 tax year
- $2,400 is the calculated interest for 20X4 tax year ($80,000 ($90,000 - $10,000) principal balance X 3% prescribed rate X 365 days/365 days)
- minus $1,600 is the amount Judith paid in interest to her employer
- equals $800 is the value of the benefit to be included on the T4 slip in code 36 and in box 14 for 20X4 tax year
Calculations for 20X5 tax year
- $2,100 is the calculated interest for 20X5 tax year ($70,000 ($80,000 - $10,000) principal balance X 3% prescribed rate X 365 days/365 days)
- minus $1,400 is the amount Judith paid in interest to her employer
- equals $700 is the value of the benefit to be included on the T4 slip in code 36 and in box 14 for 20X5 tax year
Calculations for 20X6 tax year
- $2,000 is the calculated interest for 20X6 tax year ($50,000 ($70,000 - $20,000) principal balance X 4% prescribed rate (at the higher rate for that year after the first five years) X 365 days/365 days)
- minus $1,000 is the amount Judith paid in interest to her employer
- equals $1,000 is the value of the benefit to be included on the T4 slip in code 36 and in box 14 for 20X6 tax year
Calculate: Interest benefit for shareholders
Once you have determined that the loan received or debt incurred is because of shareholdings , the interest benefit is calculated in the tax year as follows:
- Interest calculated at the prescribed interest rates for each quarter during the period in the year that the loan or debt was outstanding (Principal balance X % prescribed rates X #days/365 days)
- minus Total of all interest for the year that any party (such as the person or partnership) paid on each loan or debt in the year or no later than 30 days after the end of the year
- equals Value of the interest benefit to be included on the T4A slip under code 117
Example – Calculations
Angele is a shareholder of 631 Inc and the company provided him with a $55,000 loan on January 1, 20X0 by virtue of her shareholdings. The loan is repayable in 10 years with an interest rate of 1.5%. Assume that subsection 15(2) does not apply to this particular loan and that in 20X1, the prescribed rates were: 3% for the 1st quarter, 3% for the 2nd quarter, 4% for the 3rd quarter and 5% for the 4th quarter. Angele made no payments on the principal balance in 20X1 and made a $200 interest payment in each quarter.
- $406.85 is the calculated interest for quarter 1 ($55,000 principal balance x 3% prescribed rate x 90 days/365 days)
- plus $411.37 is the calculated interest for quarter 2 ($55,000 principal balance x 3% prescribed rate x 91 days/365 days)
- plus $554.52 is the calculated interest for quarter 3 ($55,000 principal balance x 4% prescribed rate x 92 days/365 days)
- plus $693.15 is the calculated interest for quarter 4 ($55,000 principal balance x 5% prescribed rate x 92 days/365 days)
- minus $800 ($200 x 4) is the total interest paid on the loan in 20X1
- equals $1,265.89 is the total interest benefit to be reported on the T4A slip in code 117
Update – Clarification Calculate: Interest benefit for back-to-back shareholder loan arrangement
Once you have determined that there is a loan deemed to have been made under a back-to-back shareholder loan arrangement (and where none of the exceptions under step 2 apply) the interest benefit is calculated in the tax year as follows:
Calculate the specified interest amount for the year
- Average amount outstanding for the year relating to the loan deemed to have been made under the back-to-back shareholder loan arrangement
- divide by Total of each of the average amounts outstanding in the year of all debts owing by one or more funders (excluding ultimate funders) to the ultimate funder
- equals Subtotal
- multiply by The amount of interest for the year paid (not later than 30 days after the end of the year) on all debts, owing by one or more funders (excluding the ultimate funder) to the ultimate funder, that gave rise to the back-to-back loan arrangement
- equals Specified interest amount
Calculate the interest benefit on the back-to-back shareholder loan arrangement
- Interest calculated at the prescribed interest rates for each quarter during the period in the year that the loan or debt was outstanding (principal balance X % prescribed rates X #days/365 days)
- minus Specified interest amount
- equals Value of the interest benefit to be included on the T4A slip in code 117
Calculate: Forgiven loans or debts
Once you have determined the benefit is forgiven loan or debt , the amount forgiven must be included on the T4 or T4A slip in the tax year in which the amount is forgiven.
An interest benefit must also be calculated for any part of the loan not forgiven in the tax year, continue to Calculate: Interest benefit for employees or Calculate: Interest benefit for shareholders.
Withhold payroll deductions
If the benefit is taxable, you must withhold the following deductions.
The withholding and remitting requirement depends on the type of remuneration: cash , non-cash , or near-cash .
Non-cash and near-cash (interest benefits): Option 1
Withhold:
- Income tax
- CPP
- EI (do not withhold)
Remit:
- GST/HST (do not remit, financial services are GST/HST exempt)
Cash (forgiven loans and repayable awards): Option 2
Withhold:
- Income tax
- CPP
- EI
Remit:
- GST/HST (do not remit, financial services are GST/HST exempt)
Learn more: How to calculate – Calculate payroll deductions and contributions.
Report the benefit on a slip
If the benefit is taxable, you must report the following on the T4 slip.
T4 – Employee: Option 1
Report on:
- Box 14 – Employment income
- Box 26 – CPP/QPP pensionable earnings
- Code 36 – Interest-free and low interest loans (interest benefit)
- Code 40 – Other information for benefit not reimbursed for forgiven/repayable awards
T4A – Person or partnership that was a shareholder: Option 2
Report on:
- Code 117 – Loan benefits
Learn more: Fill out the slips and summaries – File information returns (slips and summaries).
References
Legislation
- ITA: 5(1)
- Income from office or employment
- ITA: Section 6
- Amounts to be included as income from office or employment
- ITA: 6(1)(a)
- Value of benefits
- ITA: 6(1)(b)
- Personal or living expenses (allowances)
- ITA: 6(9)
- Interest benefit received because of employment is included in income
- ITA: 6(15)
- Forgiveness of the employee's debt
- ITA: 6(15.1)
- Amount taxable is equal to the amount of forgiven debt
- ITA: 6(19) to 6(23)
- Relocation benefits and moving expenses
- ITA: 15
- Transactions between corporation and shareholders
- ITA: 15(1)
- Benefit conferred to shareholder
- ITA: 15(2)
- Shareholder debt
- ITA: 15(2.16)
- Back-to-back arrangement – Application
- ITA: 15(2.17)
- Back-to-back arrangement – Consequences
- ITA: 15(9)
- Shareholder interest benefit
- ITA: 56(1)
- Scholarships, bursaries, and more
- ITA: 56(2)
- Inclusion in income of indirect payments
- ITA: 80.4
- Interest benefit (exemption for employee debt forgiveness)
- ITA: 80.4(1)
- Employee benefit calculation (home purchase and relocation loans)
- ITA: 80.4(2)
- Shareholder interest benefit calculation (home purchase and relocation loans)
- ITA: 80.4(3), 84.4(3)(a) and 84.4(3)(b)
- Where ss. (1) and (2) do not apply
- ITA: 80.4(6)
- Deemed new home purchase loans
- ITA: 80.4(7)
- Home purchase loans and specified interest amount
- ITA: 246(1)
- Benefit conferred on a person – directly or indirectly
- ITA: 248(1)
- Home relocation loans
- ITA: 251(1)
- Deal at arm's length
- CPP: 12(1)
- Amount of contributory salary and wages
- ETA: 173
- Taxable benefit is considered a supply for GST/HST purposes
- IECPR: 2(1)
- Amount of insurable earnings
- IECPR: 2(3)
- Amounts not included in insurable earnings
- IECPR: 2(3)(a.1)
- Amounts not included in insurable earnings when excluded as income under paragraph 6(1)(a) or (b), or subsection 6(6) or (16) of the Income Tax Act
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