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Calculating the taxable benefit on a home purchase loan
By Annie Chong
|Canadian Payroll Reporter|Last Updated: 01/05/2015

Question: We are lending money to an employee to purchase a home. How do we determine the resulting taxable benefit?

ANSWER: When an employer provides an employee (or an employee’s dependant) with a home purchase loan that is interest-free or at an interest rate that is lower than the current government-prescribed rate, a taxable benefit results. The benefit is calculated in exactly the same way as it is for a regular loan, except for the following consideration: the government-prescribed interest rate in effect at the time the employer grants the loan remains constant for five years or the life of the mortgage, whichever is earlier, unless the prescribed rate decreases below the employer’s rate.

Example: An employer provides an employee with a home loan of $75,000. The employee is repaying $5,000 at the end of each quarter. The company is charging an interest rate of 0.5 per cent. The government-prescribed interest rate in effect at the time is two per cent.

The government-prescribed rates for the year (in this fictitious example) are: two per cent for the first quarter, one per cent for the second quarter, one per cent for the third quarter and three per cent for the fourth quarter.

A

B

C

D

E

F

Loan

Payment

Interest at prescribed rate

Interest at company rate

Taxable
benefit (C-D)

Payment (principal) (B-D)

$75,000.00

$5,000.00

$75,000
x 2 per cent
÷ 4 = $375.00

$75,000
x 0.5 per cent ÷ 4 = $93.75

$375
- $93.75
= $281.25

$5,000
- $93.75
= $4,906.25

$70,093.75

$5,000.00

$70,093.75
x 1 per cent
÷ 4 = $175.23

$70,093.75
x 0.5 per cent ÷ 4 = $87.62

$175.23
- $87.62
= $87.61

$5,000
- $87.62
= $4,912.38

$65,181.37

$5,000.00

$65,181.37
x 1 per cent
÷ 4 = $162.95

$65,181.37
x 0.5 per cent ÷ 4 = $81.48

$162.95
- $81.48
= $81.47

$5,000
- $81.48
= $4,918.52

$60,262.85

$5,000.00

$60,262.85
x 2 per cent* ÷ 4 = $301.31

$60,262.85
x 0.5 per cent ÷ 4 = $75.33

$301.31
- $75.33
= $225.98

$5,000
- $75.33
= $4,924.67


Total taxable benefit: $281.25 + $87.61 + $81.47 + $225.98 = $676.31

*Note: We used a prescribed rate of 2 per cent in this quarter due to protection against increases in the prescribed rate for home loan purchases.

The taxable benefit is subject to C/QPP contributions and income tax deductions, but not EI or QPIP premiums. For year-end reporting, report on the employee’s T4 the taxable benefit of $676.31 in box 14 and in the "Other Information" area using code 36. Employers with Quebec payrolls must also report the benefit in boxes A and L on the RL-1.

Note: Employees who receive a loan towards the purchase of a home and who relocate may be eligible for a tax reduction on their personal income tax return. To qualify, the employees must have relocated in order to maintain their employment or to start a new job at a new work location, and their new residence must be at least 40 km closer to work than was the old residence. The employer must calculate the amount that will be eligible for deduction and report it on the T4 (and RL-1 for employers with Quebec payrolls). The amount eligible for deduction is the lesser of the actual value of the taxable benefit or the value of the taxable benefit as calculated on a $25,000 interest-free home purchase loan for the same period.

Example:

Using our previous example of a home purchase loan, and assuming that the employee is eligible for a tax deduction on his personal income tax return, the employer’s obligation is to calculate and report the eligible deduction amount as follows:

$676.31 or

$25,000.00 x 2 per cent = $500

$25,000.00 x 1 per cent = $250

$25,000.00 x 1 per cent = $250

$25,000.00 x 2 per cent* = $500

$1,500

Report the amount that the employee can deduct ($676.31) in the "Other Information" area of the T4, using code 37. Do not report this amount in box 14. For Revenu Québec reporting, enter "L-5", followed by the amount the employee can deduct in one of the blank boxes in the centre of the RL-1.

*Note: We used a prescribed rate of 2 per cent in this quarter due to protection against increases in the prescribed rate for home loan purchases.