Today we’re going to dive into a tax related topic. My tax knowledge is based on the Canadian Income Tax Act so it might be uniform across North America or it might differ from country to country.
However, this is how to account for loans in tax when you receive one as an employee from your employer.
Firstly, you need to understand whether or not this is classified as a shareholder loan or an employee loan. The way to do that is by asking some simple questions:
1) Are all other employees in the company eligible to receive this loan?
2) Would someone in my position in a similar firm be able to receive this loan?
3) If I am also a shareholder in the company do I not have any control or influence in the company?
If the answer is Yes to the mentioned questions than the loan is considered an employee loan and if not a shareholder loan.
Employee loans are more lenient in not having to include the loan as income.
If the loan was acquired:
1) for buying a vehicle for business use, buying shares in the company or buying a place to live in (condo or house)
2) With an arranged upon repayment schedule that is reasonable
3) For a reasonable amount for the use of the loan
Then the loan will not have to be included in income for the year you took out the loan. If not all of these conditions are met you will have to include your loan as income for the year you acquired it.
For a shareholder loan you repayment period is much more strict. Unless the loan is agreed to be repaid within one year of the next year-end of the company you will need to include the loan as income. For example if you take the loan out Dec. 1st, 2015 and the company has a year end of Dec. 31st. You can agree to pay the loan back anytime before Dec. 31st, 2016 for it not to be included as income.
Lastly, if your loan was allowed to not be included as income and you agreed upon paying an interest rate lower than the prescribed rate (going rate) for loans at that time, including interest-free loans, you will have to include an interest benefit. This means that since you’re getting an advantage of not paying the extra interest you, the government still wants you to claim your savings as a benefit and increase your income.
The way this is calculated is the principal amount of loan multiplied by the difference between the prescribed rate and what you agreed upon multiplied by the amount of months outstanding in the year over 12.
Example: Prescribed Rate = 2%
You take out a loan for $100,000 at 1% on July 1st with a Dec. 31st Year-End.
(100,000 * (2%-1%) * 6/12) = $500
$500 would be your interest benefit for the year.
Even though many people don’t need to know this unless your an accountant or tax specialist, it’s still good to know as an employee if there is a loan policy available what the tax consequences can be.
If you have any other questions regarding the topic feel free to send me an email.
Hope this helps!