Interest-Free or Low-Interest Employee Loans in Ontario: The Taxable Benefit Explained

An employer lending money to an employee sounds like a simple favour — help with a car, a move, or a rough patch. But the Income Tax Act treats an interest-free or below-market loan from an employer as something the employee received value from, and that value is generally taxed as a taxable benefit, even though no cash actually changed hands for "interest."

This surprises a lot of people, because it feels like nothing happened: no interest was charged, no invoice was sent. Understanding how the CRA calculates this deemed benefit — and where the exceptions lie — helps both employers structuring a loan and employees receiving one avoid an unwelcome number showing up on a T4.

Why the Tax System Cares About "Free" Money

If an employer simply gave an employee cash, it would obviously be taxable income. An interest-free loan is economically similar: the employee gets the use of money without paying what it would normally cost to borrow it elsewhere. The Income Tax Act closes that gap by deeming the employee to have received a benefit equal to the interest they would have paid at a government-set rate, minus whatever interest they actually paid.

How the Benefit Is Calculated

1. Start with the CRA’s prescribed rate. The CRA sets a prescribed interest rate every quarter that applies to, among other things, employee and shareholder loans.
2. Apply it to the loan balance for each period it was outstanding. The deemed interest is calculated on the loan balance, prorated for however long it was outstanding during the year, using whichever prescribed rate applied in each quarter.
3. Subtract any interest the employee actually paid on the loan for the year, provided it was paid within the short window the Income Tax Act allows after the year-end — confirm the current timing with a tax professional rather than assuming.
4. The remainder is the taxable benefit, added to the employee’s income for that year (and reported by the employer, where the employer is the lender).

How the rate itself works: As of the third quarter of 2026, the CRA’s prescribed base rate used for this kind of benefit was 3% — the CRA resets this figure every quarter, so verify the current quarter’s rate before doing any calculation rather than relying on a past figure. For a loan outstanding across several quarters, the deemed interest is worked out quarter by quarter using whatever rate applied at the time, then totalled for the year and reduced by any interest the employee actually paid.

What Reduces or Eliminates the Benefit

• Interest the employee actually pays, if paid on time, is subtracted dollar-for-dollar from the deemed benefit.
• Loans used to earn income — for example, an interest-free loan used to buy investments that will produce taxable income — may allow the employee to claim an offsetting deduction, though this depends on how the borrowed funds were actually used and should be confirmed with a tax professional.
• Certain home-relocation loan arrangements have their own specific rules under the Income Tax Act; the mechanics are technical enough that they should be reviewed with an accountant or tax lawyer rather than assumed.

What This Means for Employers

An employer that makes loans to employees — including a corporation lending to a shareholder-employee — has a reporting obligation for the deemed benefit and should track the prescribed rate for each quarter the loan is outstanding. Getting the calculation wrong can mean an under-reported T4 and a later CRA reassessment covering multiple years at once.

Frequently asked questions