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Jim Maroney Jim Maroney

:: CCRA allows five-year loans at prescribed interest rates for home puchase loans and home relocation loans

:: In my last article I discussed an income splitting technique that took advantage of CCRA’s historically low interest rate, known as the “prescribed rate”. Recall, CCRA sets this rate each quarter (January 1, April 1, July 1 and October 1) throughout the year based on the average interest rate on 90-day treasury bills during the first month of the preceding quarter. Currently, the prescribed rate is a mere 2 per cent, although, the rate is set to rise to 3 per cent at the end of this month. With interest rates seemingly on the rise, further increases in the prescribed rate are anticipated.

Many taxpayers will have unwillingly encountered CCRA’s prescribed rates when they’ve paid their taxes late or paid insufficient instalments throughout the year. In each of these cases CCRA, uses the prescribed rate plus an extra 4 per cent “bonus” (call it a super prescribed rate) to assess interest on the amounts owing but unpaid. Now before you get to thinking that the prescribed rate is nothing but bad news – there are situations where taxpayers can put the prescribed rate to good use.

In general, if an employer provides an employee with a low-interest or no-interest loan during the year, an interest benefit must be included in the employee’s income. This benefit is calculated using – you guessed it – the prescribed rate of interest. As I’ve already noted, the prescribed rate changes quarterly so the amount of the benefit changes as interest rates change, albeit in a slightly delayed fashion due to the method use to determine the prescribed rate.

CCRA makes this a very difficult road to travel

So where’s the good news? Well, general rules, by their nature, have exceptions and there is an exception to the general employer-to-employee loan rules that can provide fortunate employees with a nice 5-year perk.

The operative word here is “fortunate” since loans that qualify for this extended treatment are special loans known as “home purchase loans” or “home relocation loans”.

Greatly simplifying the description, a “home purchase loan” is, as the name implies, essentially a loan provided by an employer to an employee to enable that employee to acquire a “dwelling” for his or her habitation. The term dwelling isn’t restricted to a single-detached house but includes a condominium, townhouse, mobile trailer and even a share of a cooperative housing corporation.

A close cousin to the “home purchase loan, the “home relocation loan” is a loan from an employer to an employee to enable the employee to move from an “old residence” to a new residence that is at least 40 kilometres closer to a “new work location”. Notice that the work location must be new – simply moving 40 kilometres closer to an existing work location won’t do the trick. This type of loan usually arises where an employer transfers an employee to work at a new branch or office of the business.

For both “home purchase loans” and “home relocation loans” the 5-year perk arises in the method used to calculate the interest benefit. Rather than adjusting the prescribed rate quarterly, these loans enable the rate to be locked in for five years. Actually, the way the rules work, the interest rate used in calculating the interest benefit is guaranteed not to exceed the prescribed rate in effect when the loan is made for a period of five years. In essence, the employee is provided with a five-year guarantee that the interest rate will not be higher than the prescribed rate in existence when the loan was made. With the current prescribed rate at a lofty 2 per cent this assures pretty cheap financing for a five-year period.

And as if that wasn’t enough, for “home relocation loans”, there’s an additional tax break provided in the form of a tax deduction that is equal to the taxable benefit calculated on a loan of $25,000. This special deduction basically results in the first $25,000 of a home relocation loan being interest-free for five years. Unfortunately, this additional benefit has a sunset clause causing its demise after the first five-year period.

Finally, at the end of year five, if a “home purchase loan” or a “home relocation loan” is still outstanding, a new loan is deemed to be made and the prescribed rate at that time will establish a new interest rate ceiling for a further five years.

So far these special loans look like a pretty good deal but there is a danger where the employee is also a shareholder of the company providing the loan. This is very common in small business situations so small business owners need to look out. The catch with these special loans is that they must be provided to the employee by virtue of his or her employment and not his or her shareholdings. If the loan is provided by virtue of the employee’s shareholding in the company, CCRA will want to include the entire amount of the loan in the recipient’s income. Ouch!

Whether a loan is provided to an employee by virtue of employment rather than shareholdings is always a question of fact. Suffice it to say that CCRA makes this a very difficult road to travel and many owner-managers would be wise not to venture out.

But for those fortunate employees, “home purchase loans” and “home relocation loans” are a good deal.



Free Tax Advice Article Submitted to Income Tax Canada.net exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

Official details about this and other topics on income taxes can be found in English & Francais at www.ccra-adrc.gc.ca
Canada Revenue Agency (CRA) / l'Agence du revenu du Canada (ARC) offers bilingual information on its website for
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