If you receive a loan from employer “because of your office or employment” with no or low interest, an imputed interest rule in the Income Tax Act will generally apply to include an imputed interest benefit in your income. For these purposes, the loan will be deemed to be received by you because of your office or employment if it is reasonable to conclude that, but for your employment, either the terms of the loan would have been different or the loan would not have been received. (If you are, or are related to, a significant shareholder in the company, the CRA will normally say that the shareholder-benefit rules apply and these rules do not.)
During each year in which the loan remains outstanding, you will include in your income:
- The prescribed rate of interest computed on the principal amount outstanding throughout the year
minus - The interest you pay on the loan within the year or by January 30 of the following year.
Therefore, if you pay at least the prescribed rate of interest, you will not be required to include an amount in income. The prescribed rate is set every quarter of every year and is based on 90-day government Treasury bill yields. It is currently 1% per annum and has been for almost all of the past seven years.
Furthermore, you do not include the benefit in your income if the loan carried an interest rate, at the time the loan was made, that was at least as much as an arm’s length rate of interest that would have been charged by a creditor in the money-lending business.
Special rule for home purchase loan
If you use the loan to acquire a home, the deemed interest benefit is effectively “capped” at the rate in effect at the time of the loan. As such, if prescribed rates increase beyond that initial rate, the deemed benefit will not increase.
On the other hand, if prescribed rates decrease below the initial rate, the benefit will be reduced accordingly. (However, from 1% the rate has nowhere to go down, since it is always rounded up to the nearest 1%.)
The “cap” is re-set after five years, if the loan remains outstanding at that time.
Further special rule for home relocation loan
Another rule applies if you move and use the loan to acquire a home that is at least 40 kilometres closer to a new place of employment than your former home. Under this rule, you normally deduct the amount of the interest benefit on the first $25,000 of the principal amount of the loan in computing your taxable income.
Basically, the rule means that you won’t be taxed on the first $25,000 of the loan.