Employee loans are subject to an imputed taxable interest benefit that is computed at the CRA prescribed interest rate and applies throughout the period the loan is outstanding. If you pay interest on the loan at a rate that is at least equal to the CRA prescribed interest rate, and such interest is paid by January 30 for the preceding calendar year, then the imputed interest benefit does not apply.
Interest paid to your employer on these loans is only deductible to you if the loan is used to earn income from business or property. If the loan is used for personal reasons, the interest is not deductible.
If the interest on the employee loan is not deductible, be sure to pay any interest payable on the loan for 2020 by January 30, 2021 to reduce or eliminate your taxable benefit. Where the interest on the loan is not paid by January 30, the imputed interest benefit discussed above will apply.
If you have an existing employee interest-bearing loan that was used for one of the qualifying purposes listed above (e.g., home purchase), consider renegotiating the loan with your employer to minimize taxable benefits by “locking in” the loan at a lower prescribed interest rate for a five-year term. The prescribed interest rate currently in effect is one per cent.
The taxable benefit is based on original cost of the automobile and does not decrease as the car ages. Consider purchasing the car from the company by way of an interest-free loan from your employer and personally claiming depreciation on the car.
Avoid employer-owned vehicles costing over $30,000.
You can reduce the taxable benefit if your automobile is used primarily (generally, greater than 50 per cent) for business purposes and by keeping your personal use to less than 20,000 kilometers per year.
A Canadian resident who works in the United States may deduct contributions made to an American pension plan, under certain circumstances, up to the taxpayer’s RRSP deduction limit.
This will reduce the individual’s unused RRSP contribution room.
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