The Income Tax Act includes specific rules designed to prevent employers from offering tax-free or tax-deferred compensation through employee loans. How a loan is taxed depends on the relationship between the borrower and the company, as well as the loan's purpose.
Loans to an Employee
If you are an employee of the corporation and receive a loan that meets certain criteria, the loan might be exempt from being included in your income in the year it’s provided. However, the loan must be provided in your capacity as an employee, not as a shareholder. If you're both an employee and a shareholder, you may still qualify for the employee exemption if the loan was made based on your employment role, not because of your ownership in the company. To qualify for this exemption, the loan must meet the following criteria:
Less Than 10% Ownership
The loan is made to an employee who owns less than 10% of any class of shares of the corporation or a related corporation.
This also applies if you deal at arm's length with the corporation, meaning you don’t have significant influence over the business decisions of the company.
Home Purchase Loan
The loan is made to the employee or the employee's spouse to acquire a dwelling (a home).
Share Purchase Loan
The loan is used to acquire treasury shares of the corporation, meaning shares issued directly by the company rather than purchased from other shareholders.
Vehicle Purchase Loan
The loan is provided to acquire a vehicle for employment purposes, specifically for carrying out your duties as an employee.
Key Considerations
Capacity as a Shareholder vs. Employee: If you have significant influence over the corporation's business policies (due to your shareholdings or position in the company), the CRA may assume you received the loan as a shareholder, making it taxable. However, if loans under the same terms and conditions are offered to other employees who are not shareholders, this presumption may not apply.
Comparable Treatment for Employees: If all employees are either shareholders or related to shareholders, the CRA may look at similar-sized businesses to see if loans on similar terms are offered to employees who are not shareholders. If this is common in the industry, the loan might not be taxable.
Bona Fide Repayment Arrangements: For the exception to apply, bona fide arrangements must be made to repay the loan at the time it is granted. This means there must be a clear and reasonable repayment plan.
Conclusion
To avoid having the loan treated as taxable income, it must be made based on your employment role, meet specific criteria, and include a clear plan for repayment. If these conditions are met, you can benefit from the loan without immediate tax consequences.
For more detailed information, you can refer to the CRA's official guide on employee loans: CRA Guide on Loans
Posted on 15 September 2024