Problems with low-interest loans

Zoomer | January 1st, 2006

Be careful of low- or no-interest loans to close family members, especially to your spouse or minor children.. Loans made with no interest or with interest that is below “market” (the applicable quarterly rate as set by the CCRA) which are used for investing purposes will be subject to the “income attribution” rules. That means that any interest or dividends earned will be attributed back to you for tax purposes.


If you have relatives working for you in a family business, any interest-free or low-interest loans will be considered as a taxable benefit. This means the amount of “imputed interest” must be added to the person’s taxable income each year.


^Solution: Check the CCRA prescribed rate for the current quarter and have the borrower pay interest at that rate. The prescribed rate is usually well below market rate and has been as low as 2 percent in recent years. This will eliminate any taxable benefit to the employee. Note that the company must declare the interest payments and pay tax on them at the applicable corporate rate, which will be very low if it is a small business