Low-interest employee loan benefit

A buyer may find this in the seller’s books as a loan receivable from an owner, a manager or a family member who also works in the business. The loan may have been informal, but the tax rules look at why it was made and what interest was paid.

What section 80.4 says

Under subsection 80.4(1), where a person or partnership receives a loan or otherwise incurs a debt because of or as a consequence of an individual’s previous, current or intended office or employment (or because of services performed by a corporation carrying on a personal services business), the individual or corporation is deemed to have received a benefit. The benefit is the amount, if any, by which interest computed at the prescribed rate, plus interest paid or payable for the year by the employer or certain other persons, exceeds the interest for the year paid on the loan not later than 30 days after the end of the year and certain reimbursements. Subsection 80.4(3) lists loans to which subsections (1) and (2) do not apply, among them a loan carrying at least the rate arm’s length parties would have agreed on, subject to the conditions it sets out. CRA’s folio on shareholder loans says that where subsection 15(2) does not apply to a loan to a shareholder-employee and the loan was low-rate or interest-free, section 80.4 may deem an interest benefit to arise.

What to ask

• A list of loans to owners, managers and their relatives, and their terms
• Whether interest was paid on each loan, and when
• Whether a benefit was reported on the borrower’s slips
• Whether the loan will be repaid at closing

See can a company lend money to a director or employee and shareholder loan.