How is a low interest or interest free loan to an employee taxed in 2026?
An interest free or low interest loan to an employee creates a taxable benefit under ITA 80.4(1): interest at the prescribed rate, 3% in every quarter of 2026, minus interest the employee pays by January 30 of the next year. It goes in T4 box 14 with code 36, and takes income tax and CPP but not EI.
What is the taxable benefit on an employee loan in 2026?
Subsection 80.4(1) applies when a person receives a loan or incurs a debt because of an individual's previous, current or intended employment. The individual is deemed to receive a benefit equal to interest at the prescribed rate for the period the loan was outstanding in the year, less interest paid for the year no later than 30 days after it ends laws-lois.justice.gc.ca. Subsection 6(9) then puts that benefit into employment income
laws-lois.justice.gc.ca.
The prescribed rate for employee and shareholder loan benefits was 3% in all four quarters of 2026: canada.ca,
canada.ca,
canada.ca and
canada.ca. As of October 2026, the CRA has not published the Q1 2027 rate
canada.ca. For every quarter side by side, see CRA prescribed interest rates 2026.
The loan doesn't have to go to the employee. A loan to the employee's spouse or another related person counts if it's reasonable to conclude it wouldn't exist, or would carry different terms, without the employment canada.ca. The benefit is still taxed to the employee.
| Loan or debt | Taxable benefit in 2026 | Rate used | Reported |
|---|---|---|---|
| Interest free or low interest loan | Prescribed interest less interest paid by January 30, 2027 | 3% each quarter | T4 box 14, code 36 |
| Salary overpayment the employee repays over time | Same calculation, it is a debt from employment | 3% each quarter | T4 box 14, code 36 |
| Home purchase or home relocation loan | Same, capped at the rate when the loan was made | Lower of 3% and the ceiling | T4 box 14, code 36 |
| Total loans of $10,000 or less in the year, term 60 days or less, repaid on time | None, under CRA administrative policy | None | Nothing |
| Loan at an arm's length rate from a lender whose business is lending money | None, 80.4(3)(a) | None | Nothing |
| Payroll advance on future pay | Not a loan: employment income when received | None | T4 box 14 as pay |
| Principal the employer forgives | The forgiven amount, under 6(15) | None | T4 box 14, code 40 |
The small loan relief has applied since January 1, 2023, and only to employees. If the full principal isn't repaid within 60 days, the whole interest benefit is taxable on that year's T4 canada.ca.
How do the home loan ceiling and the five year reset work?
A home purchase loan is the part of an employment loan used to buy a dwelling, or a cooperative housing share that gives the right to live in one, for the employee or a related person, or to repay such a loan laws-lois.justice.gc.ca. A home relocation loan needs more: the employee moves to start work at a new location in Canada, the new home is at least 40 km closer to that work location, the loan is used to buy the new home, and the employee designates it as a home relocation loan
canada.ca.
Both get the same ceiling. Under 80.4(4), the benefit can't exceed interest at the prescribed rate in effect when the loan was received. If quarterly rates later fall below that ceiling, the lower rate applies canada.ca. So the ceiling only helps an employee whose loan was made at a low rate.
| Home loan received | Ceiling | Source | Rate used for 2026 |
|---|---|---|---|
| July to September 2021 | 1% | 1% until the fifth anniversary, then 3% | |
| January to March 2024 | 6% | 3%, the lower quarterly rate | |
| April to June 2025 | 4% | 3%, the lower quarterly rate | |
| Any quarter of 2026 | 3% | 3% |
The ceiling doesn't last for the life of a long loan. Under 80.4(6), when the repayment term is longer than five years, the balance outstanding five years after the loan was received is treated as a new loan received on that date laws-lois.justice.gc.ca. The new ceiling is the prescribed rate on that date. Every home loan made at 1% in 2021 hits this reset during 2026.
Older articles mention a deduction for the benefit on the first $25,000 of a home relocation loan. That was paragraph 110(1)(j), and it has been repealed (2017, c. 20, s. 8), so the employee gets no offset laws-lois.justice.gc.ca.
Worked example: a 2021 relocation loan resets to 3% in 2026
Your client relocated an employee and lent them $150,000, interest free, on July 1, 2021, to buy a home near the new office. The employee designated it as a home relocation loan. Principal is due in one payment in 2031, so the term is longer than five years. No principal was repaid in 2026, and the employee is not a shareholder.
For the first half of 2026 the prescribed rate was 3%, but the 2021 ceiling holds the benefit to 1%. On July 1, 2026, the $150,000 balance becomes a new loan at the 3% rate then in effect.
| 2026 period | Days | Rate used | Why | Interest |
|---|---|---|---|---|
| January 1 to March 31 | 90 | 1% | Q1 rate 3%, capped at the 2021 ceiling | $369.86 |
| April 1 to June 30 | 91 | 1% | Q2 rate 3%, capped at the 2021 ceiling | $373.97 |
| July 1 to September 30 | 92 | 3% | Deemed new loan on July 1, new ceiling 3% | $1,134.25 |
| October 1 to December 31 | 92 | 3% | Q4 rate 3% | $1,134.25 |
| Total | 365 | $3,012.33 |
Each line is $150,000 × rate × days / 365. The employee paid no interest, so the 2026 benefit is $3,012.33, up from $1,500 in 2025, when every quarter's prescribed rate (4% or 3%) sat above the 1% ceiling. From 2027 the new 3% ceiling caps the benefit at $4,500 a year on the same balance, even if rates rise.
If the loan had carried 1% interest instead, the employee would owe $1,500 for 2026. Paid by January 30, 2027, it brings the benefit down to $1,512.33. Paid on February 1, 2027, it misses the 30 day window and the benefit stays at $3,012.33.
How do you report and withhold on the benefit?
The interest benefit is a non cash benefit. Withhold income tax and CPP on it, don't withhold EI, and don't charge GST/HST, because financial services are exempt. The benefit goes in box 14 and box 26 of the T4 with code 36 canada.ca.
| Amount | T4 code | In box 14 | CPP | EI | GST/HST |
|---|---|---|---|---|---|
| Deemed interest benefit | 36 | Yes | Yes | No | No |
| Forgiven principal | 40 | Yes | Yes | Yes | No |
One more amount goes under code 40: interest the employer, or a person related to it, paid on the loan that the employee didn't reimburse by January 30 canada.ca.
The CRA's benefits chart lists loans and employee debt under codes 36 or 40, and code 117 on a T4A for shareholders canada.ca. The codes break down box 14; they don't add to it. See T4 box 14 and T4 other information codes for how they feed line 10100.
The loan doesn't need to be outstanding on December 31. When the employee repays principal during the year, compute separate periods on the declining balance canada.ca.
The benefit can come back as a deduction. Section 80.5 deems it to be interest paid for paragraph 20(1)(c) and subparagraph 8(1)(j)(i) laws-lois.justice.gc.ca. So an employee who used the loan to buy an investment that earns income, or a car used in their job, may deduct it as interest if those provisions' own conditions are met.
What happens when the employer forgives the loan?
Subsection 6(15) deems a benefit when an obligation is settled or extinguished, valued at the forgiven amount at that time, and 6(15.1) borrows the meaning of forgiven amount from subsection 80(1) laws-lois.justice.gc.ca. For an employment loan, the CRA treats the forgiven amount as employment income in the year it's forgiven. If only part is forgiven, only that part is income
canada.ca.
Forgiveness is a cash benefit, so it takes income tax, CPP and EI, unlike the interest benefit. It goes in box 14 with code 40. The small loan relief never covers a forgiven amount, and the interest benefit keeps running on whatever principal is still owed canada.ca.
In the worked example, forgiving $20,000 of the $150,000 in 2026 adds $20,000 to box 14 under code 40, and the interest benefit runs on $130,000 from that date.
The capacity matters. When the borrower is also a shareholder and got the loan because of the shares, the CRA treats the forgiven amount as shareholder income, not employment income, even if they're an employee too canada.ca. That route runs through 15(1.2) and is covered in shareholder loan forgiveness. For a corporation's own side of a forgiven debt, see debt forgiveness rules.
What changes when the employee is also a shareholder?
The same 3% applies, but under 80.4(2), and the benefit goes on a T4A with code 117 instead of a T4 canada.ca. The $10,000 and 60 day relief doesn't apply to a loan received because of shareholdings.
The bigger risk is the principal. A loan to a shareholder can be income in full under 15(2) unless an exception applies or it's repaid within one year after the lender's year end. Whether the loan came from the job or the shares is a question of fact, explained in shareholder loan CRA rules. For owner managers who track this through a running balance, see the shareholder loan account. For the full list of payroll benefits, see CRA taxable benefits.
Sources
Is there a benefit if the employee repays the loan before December 31?
Yes. The benefit covers each period the loan was outstanding in the year, so a loan repaid in October still carries prescribed interest from January to October canada.ca. The exception is a loan that meets all of the $10,000, 60 day and repaid on time conditions.
Does interest paid on February 15 reduce the prior year benefit?
No. Only interest for the year paid no later than 30 days after the year ends reduces the benefit, which for a calendar year means January 30 laws-lois.justice.gc.ca. Build the January 30 payment into the loan agreement so it isn't missed.
Does a bank lending to its own staff at its public rate create a benefit?
No. Under 80.4(3)(a) there's no benefit when the rate is at least what arm's length parties would agree on and the lender's ordinary business includes lending money laws-lois.justice.gc.ca. The exception is lost if someone other than the borrower pays part of the interest.
Is a payroll advance an employee loan?
Generally not. The CRA treats an advance on future earnings as employment income in the year it's received, so it goes through payroll as pay and no interest benefit is calculated canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.