Employee Loans – What Employers Need to Know
If you’re an employer offering small, short-term loans to your team—or an employee who’s received one—there’s some good news from the CRA (Canada Revenue Agency) that could save you from a tax surprise.
Can I give my employees a loan from my company?
Yes, but it’s important to understand the tax implications. If you provide a loan to an employee or a shareholder, the Canada Revenue Agency (CRA) may consider it a taxable benefit depending on the terms and reason for the loan.
What makes a loan to an employee taxable?
If a loan is provided because of employment (i.e., the employee wouldn’t have received it if they weren’t employed), then any interest benefit from that loan may be taxable. This includes situations where the loan has a lower-than-market or zero interest rate.
Are there any exceptions where the loan won’t be taxable?
Yes, a loan won’t result in a taxable interest benefit if:
- The total loan(s) to an employee in a calendar year are $10,000 or less
- The loan term is 60 days or less
- The loan isn’t related to the person being a shareholder
If all the above conditions are met, the CRA’s administrative policy allows the loan to be non-taxable.
What if I forgive the loan later on?
If any part of the loan is forgiven, that amount plus any accrued interest at the CRA’s prescribed rate or higher, becomes taxable — no exceptions. Forgiven employee loans are treated as employment income and must be reported on a T4 slip in the year they’re forgiven.
What if the loan is to a shareholder instead of a regular employee?
Loans to shareholders (or to individuals connected to them) are generally always taxable, even if they are employees as well. Forgiven shareholder loans are considered shareholder benefits and are reported differently from employee loans. For more details, see https://www.achenhenderson.ca/corporate-tax-accountants/shareholder-loan-account-cra/
What about advances in pay — are those considered loans?
No. If you advance pay to your employee (like paying them early for future hours worked), it’s considered employment income, not a loan. It should be taxed and reported in the year paid.
Can I give a loan to help my employee buy a house or move to work?
Yes. If the loan is specifically for a home purchase or relocation related to employment, it may qualify for special tax treatment. Home relocation loans, for example, must meet specific CRA rules — like the new home being at least 40 km closer to the new work location.
Do I have to charge interest on a loan to an employee?
Not necessarily, but if the interest rate is below the CRA’s prescribed rate, a taxable benefit arises, subject to the exception above. You’ll need to calculate and report the interest benefit on the employee’s T4. If the loan is at or above a market rate, there may be no taxable benefit.
How do I report a taxable loan on the employee’s T4?
You must include:
- Box 14 – Employment income
- Box 26 – CPP/QPP pensionable earnings
- Code 36 – Interest-free and low-interest loans
- If the loan was forgiven, also include:
- Code 40 – Other taxable benefits
How do I handle taxes and payroll deductions on these loans?
If the interest benefit is taxable, you must deduct:
- Income tax
- CPP contributions
- You do **not** need to deduct EI or remit GST/HST for interest benefits.
If the loan is forgiven (considered a cash benefit), then you must deduct:
- Income tax
- CPP
- EI (yes, in this case)
Are there special rules for education or research loans?
Yes. If you offer a forgivable loan to help an employee pursue education or research and they return to work for you after, it isn’t taxable upfront. But if the loan is forgiven because they met the condition, it becomes taxable in the year it’s forgiven.
Where can I find more detailed information?
Checkout the CRA’s guidance here https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/payroll/benefits-allowances/financial/loans-interest-free-low-interest.html for comprehensive guidance on loans to employees.
Bottom line: Should I loan money to an employee?
It’s possible and sometimes helpful — but ensure you document everything and understand how CRA views it. Speak with your accountant or payroll advisor to ensure you’re handling any loan correctly from both a legal and tax perspective.