- If your corporation lets you use its money without charging interest — or charges less than a set benchmark rate — the Income Tax Act treats the "savings" on interest as a benefit you…
- CRA sets a prescribed interest rate each quarter that serves as the floor for these calculations.
Repaying a shareholder loan on time solves one problem — but it doesn't solve all of them. Even a loan that is fully repaid within the required window can still generate a tax bill if the corporation didn't charge enough interest on it along the way. This is the deemed interest benefit, and it catches business owners who assume that "interest-free" is simply a perk of owning the company.
This guide explains why the CRA treats a below-market shareholder loan as a taxable benefit, how the benchmark interest rate is set, and how to avoid an unexpected reassessment.
Why an Interest-Free Loan Isn't Really Free
If your corporation lets you use its money without charging interest — or charges less than a set benchmark rate — the Income Tax Act treats the "savings" on interest as a benefit you received simply because you're a shareholder. That benefit gets added to your income for the year, calculated on the outstanding balance for as long as the loan (or part of it) remains unpaid.
This applies on top of, not instead of, the separate rule requiring the loan principal to be repaid within its own deadline. A loan can be fully and properly repaid on time and still generate a deemed interest benefit for every day it was outstanding.
How the Benchmark Rate Works
CRA sets a prescribed interest rate each quarter that serves as the floor for these calculations. If your corporation charges you at least this rate on the loan, and you actually pay that interest by the deadline for the following year, there is generally no deemed benefit. If it charges less — including zero — the difference between what was charged and what the prescribed rate would have required is treated as a taxable benefit to you.
As of mid-2026, the relevant CRA prescribed rate sits at 3% — this rate is reset every quarter, so verify the current rate before relying on it for any calculation. A rate that applied last year, or even last quarter, may no longer be the one that governs a loan outstanding today.
A Simplified Illustration
Say a corporation lends a shareholder a sum of money for the year, interest-free. The deemed benefit is roughly what the interest would have been at the prescribed rate for the period the loan was outstanding. If the shareholder pays that amount of interest to the corporation within the short window the rules allow after year-end, the benefit can be eliminated or reduced — but that window is tight, so confirm the exact cut-off with your accountant rather than assuming there's time. If nothing is paid, the full calculated benefit is added to income.
Comparing the Outcomes
| Scenario | Interest charged | Tax result |
|---|---|---|
| Loan at or above the prescribed rate, interest actually paid on time | At least the prescribed rate | Generally no deemed benefit |
| Loan below the prescribed rate, some interest paid | Less than the prescribed rate | Deemed benefit on the shortfall |
| Interest-free loan, nothing paid | 0% | Full deemed benefit on the whole period outstanding |
Where This Commonly Goes Wrong
- Assuming a "no interest" loan is a tax-free perk of being an owner rather than an employee.
- Charging interest but forgetting to actually pay it by the required deadline the following year — an unpaid interest charge on paper doesn't avoid the benefit.
- Losing track of the current prescribed rate, which changes quarterly and can differ from what was used on a loan taken out in an earlier year.
- Overlooking that the corporation must also report the interest income it earns if it does charge a market rate — the benefit calculation isn't the only consequence to track.
Frequently asked questions
Does the deemed interest benefit apply to loans between spouses or family members personally, not through a corporation?
No — this specific rule targets loans from a corporation to a shareholder (or someone connected to one). Personal loans between family members raise different tax considerations, including possible income-attribution issues, but not this particular deemed-benefit mechanism.
If I pay the interest late, does that fix the problem?
Interest generally needs to be paid within the required window for the prior year to avoid the deemed benefit for that year. Paying late may still leave you with a benefit already calculated into your income for the year it applied to.
Does it matter whether the loan is big or small?
The deemed benefit is calculated proportionally to the outstanding balance and the time it was outstanding, so a smaller loan produces a smaller benefit rather than avoiding the rule altogether. There is no size threshold that exempts a loan from the calculation.
Can the corporation just forgive the loan instead of dealing with interest?
Forgiving a shareholder loan is generally treated as an even more direct benefit to the shareholder and usually creates its own income inclusion. It is not a way around the interest-benefit rules — get advice before using loan forgiveness as a workaround.
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