Loans received because of employment

An employee receives a taxable benefit if you give any person or partnership a loan because of the employee's current, previous, or intended office or employment. We consider a loan 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 or intended employment.

The loan can be received by the employee or any other person or partnership, including, for example, the employee's spouse. A benefit can also arise from any other indebtedness such as the unpaid purchase price of goods or services, or an overpayment of salary that your employee repays you over a period of time.

The taxable benefit the employee receives in the tax year is the total of the following amounts:

  1. the interest on each loan and debt calculated at the prescribed rate for the periods in the year during which it was outstanding
  2. the interest on the loan or debt that was paid or payable for the year by you, the employer (for this purpose, an employer is a person or partnership that employed or intended to employ the individual and also includes a person related to the person or partnership)

    minus the total of the following amounts:
  3. the interest for the year that any person or partnership paid on each loan or debt no later than 30 days after the end of the year
  4. any part of the amount in b. that the employee pays back to the employer no later than 30 days after the end of the year

Note

Sometimes these rules do not apply. For more information, see Exceptions.

If the employee receives a taxable benefit on a loan or debt because of employment, report the benefit in box 14, "Employment income," and in the "Other information" area, report the interest benefit under code 36. Report any forgiven loan principal amounts under code 40.

For information about similar taxable benefits resulting from loans received because of services performed by a corporation that carries on a personal services business, see Archived Interpretation Bulletin IT-421R2, Benefits to individuals, corporations and shareholders from loans or debt.

Example of calculating the taxable benefit loan received because of employement

Joshua is your employee. He borrowed $150,000 from you at the beginning of the year. The prescribed rate of interest for the loan is 3% for the first quarter, 4% for the second and third quarters, and 5% for the fourth quarter. Joshua paid you $2,000 interest on the loan no later than 30 days after the end of the year. During the year, a company related to you paid $1,000 interest on the loan for Joshua. Before the end of the same year, Joshua repaid the $1,000 to the company.

Calculate the benefit to include in his income as follows:

Calculation of interest on loan amount

Prescribed interest rate Loan amount Part of year Interest for the quarter
3% $150,000 1/4 $1,125
4% $150,000 1/4 $1,500
4% $150,000 1/4 $1,500
5% $150,000 1/4 $1,875

Total interest for the quarters .................................................................................    $6,000

Plus

Amount paid by a third party ..................................................................................    $1,000

Minus

Interest paid ($2,000 + $1,000) ................................................................................    $3,000

Amount Joshua repaid ..............................................................................................    $1,000

Equals

Joshua's taxable benefit ...................................................................................    $3,000

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