Are loans taxable in Canada?

According to the Canada Revenue Agency (CRA), if a loan is provided because of employment or shareholdings, and it has either no interest or below-market interest, the difference between the actual interest charged and the CRA’s prescribed rate is considered a taxable benefit.

When is the Interest Benefit Taxable?

Employment Loans: If an employer provides an interest-free or low-interest loan to an employee, the interest benefit (the difference between the interest charged and the CRA’s prescribed rate) is taxable and must be included in the employee’s income.

Shareholder Loans: If a corporation provides a loan to a shareholder under favorable terms, this may also trigger a taxable interest benefit if the loan is not repaid within a certain time frame or is forgiven.

Forgiven Debt

Regardless of the loan’s initial purpose, if a loan is forgiven, the forgiven amount is always taxable. This means that if the loan is written off or canceled, the value of the forgiven debt is considered income and must be reported by the borrower (shareholder or employee) for tax purposes.