Low-interest loan benefit (s. 80.4)

Owners who borrow from their own company meet this rule, as do buyers who find such a loan on a target’s balance sheet. The CRA’s Income Tax Folio S3-F1-C1 says a low-interest or interest-free loan to a shareholder can result in a deemed interest benefit under subsection 80.4(2) if subsection 15(2) does not apply to the loan. The shareholder loan entry covers section 15(2).

How the benefit is measured

Section 80.4(2) applies to a person (other than a corporation resident in Canada) or a partnership (other than one each member of which is a corporation resident in Canada) that was a shareholder of the corporation, was connected with a shareholder, or was a member of a partnership or a beneficiary of a trust that was a shareholder, and that received the loan by virtue of that shareholding. Under it, the benefit for a year is the amount by which interest computed at the prescribed rate for the time the loan was outstanding exceeds the interest paid on those loans not later than 30 days after the end of the year, with a separate item for loans deemed made under subsection 15(2.17). Subsection 80.4(3) lists loans to which subsections 80.4(1) and (2) do not apply. Its conditions are specific, so read the subsection itself.

What to ask

• Which loans exist between the company and its owners, and what interest each carries
• Whether interest was paid within the period section 80.4(2) allows
• How the accountant treated each loan under sections 15(2) and 80.4; the answer on loans to a director or employee covers the lending side