A Shareholder Loan Is Taxed on the Whole Principal, and Repaying It Does Not Give All the Tax Back
A loan from your employer and a loan from your own corporation are priced by the same 3% prescribed rate, and they behave nothing alike. Borrow from an employer and you are taxed on an imputed 3% of the loan. Borrow from a corporation you own and, in the wrong circumstances, you are taxed on the entire principal in the year you took it, then recover less than you paid when you repay.
Below: the rate, the employment-loan benefit and its home purchase cap, the corporate rule that moves the charge onto the principal and the tax that never comes back, whether an investor can deduct the benefit, and the 30-day payment that removes it.
The 3% prescribed rate
Both regimes are priced by the prescribed rate under paragraph 4301(c) of the Income Tax Regulations. CRA’s Q4 2026 announcement sets it at 3%: “The interest rate used to calculate taxable benefits for employees and shareholders from interest free and low-interest loans will be 3%.” That is the rate a borrower faces today. For 1 January to 31 March 2027, CRA has not announced a rate; our calculation under 4301(a)(i) from October 2026 treasury bill auctions at 2.41% and 2.53% (a mean of 2.4700%, rounded up) also gives 3% (data as of 5 November 2026). The Q1 2027 prescribed interest rates piece sets out that derivation auction by auction. The base has been 3% in each of the six quarters from Q3 2025 to Q4 2026, and Q1 2027 would make a seventh. The CRA prescribed interest rates index lists each announced quarter.
An employment loan is taxed on a benefit
Under ITA 80.4(1), the benefit is interest computed at the prescribed rate on the loan for the period it was outstanding in the year, less interest actually paid “not later than 30 days after the end of the year”. The but-for test in 80.4(1.1) decides what counts: a loan is deemed to be because of employment if it is reasonable to conclude that, but for the office or employment, “(a) the terms of the loan or debt would have been different; or (b) the loan would not have been received or the debt would not have been incurred”. The consolidated text of ITA section 80.4 on Justice Laws carries a date modified of 2 November 2026.
Section 80.4 deems a benefit; it does not itself include it in income. ITA 6(9) does that for the employee: the amount “shall be included in computing the income of the individual for the year as income from an office or employment.” For the shareholder, 15(9) deems the amount to be “a benefit conferred in the year on a shareholder, unless subsection 6(9) or paragraph 12(1)(w) applies to the amount.” The employment route runs through 6(9), the shareholding route through 15(9), and 15(9) yields to 6(9).
The home purchase cap in 80.4(4)
For a home purchase loan or home relocation loan, the interest under 80.4(1)(a) “shall not exceed the amount of interest that would have been determined thereunder if it had been computed at the prescribed rate in effect at the time the loan was received”.
The employee is taxed on the lesser of the current prescribed rate and the rate when the loan was received. A rise is capped out. A fall is passed through, because 80.4(1)(a) still uses the current rate and the cap only bites above the origination rate. Under 80.4(6), where the term exceeds five years, the balance outstanding five years from the day the loan was received, or was last deemed received under that subsection, “shall be deemed to be a new home purchase loan received by the individual on that date”, so the cap resets. Under 80.4(7), a home purchase loan is the portion used to acquire a dwelling, or to repay a loan used to acquire one, for the habitation of the employee, a specified shareholder whose services got the loan, or a person related to either.
Case A: an Ontario resident with $150,000 of other income on the 2026 rate card, where the marginal rate on the next dollar is 44.9696%, borrows $400,000 interest-free from an employer to buy a dwelling at a 3% prescribed rate. A full year’s benefit is $12,000.00, and the tax on it, stacked on $150,000, is $5,396.35, an average of 44.97%. If the rate later rises, the cap holds the benefit there. Each year, that is worth:
| Prescribed rate | Uncapped benefit | Capped benefit | Tax saved |
|---|---|---|---|
| 4% | $16,000.00 | $12,000.00 | $1,798.78 |
| 5% | $20,000.00 | $12,000.00 | $3,597.57 |
| 6% | $24,000.00 | $12,000.00 | $5,396.35 |
| 7% | $28,000.00 | $12,000.00 | $7,195.14 |
| 8% | $32,000.00 | $12,000.00 | $9,010.72 |
Data as of 5 November 2026. At a 2% prescribed rate the benefit would be $8,000.00, not $12,000.00, which is the cap working one way.
A spousal loan’s rate rule runs the other way. Under ITA 74.5(2)(a), the attribution rules in 74.1(1) and (2) and 74.2 stay off only if interest is paid “at a rate equal to or greater than the lesser of (i) the prescribed rate that was in effect at the time the loan was made, and (ii) the rate that would, having regard to all the circumstances, have been agreed on, at the time the loan was made, between parties dealing with each other at arm’s length”. That is a condition for escaping attribution, not a requirement that a spousal loan bear interest, and it sets a floor on interest paid that a later fall does not lower. The 80.4(4) cap is a ceiling on an imputed benefit, and a fall does lower it. Prescribed-rate loans between spouses covers that floor in practice.
A loan from your own corporation can be taxed on the principal
The rule for shareholders sits in ITA section 15. Where a shareholder, a person connected with a shareholder, or a member of a partnership or beneficiary of a trust that is a shareholder, receives a loan from the corporation, under 15(2) “the amount of the loan or indebtedness is included in computing the income for the year of the person or partnership”. The charge is the principal, in the year the loan was received. It is not interest on the principal.
The owner-manager’s problem with the exceptions
The 15(2.4) carve-outs cover four kinds of employee loan: (a) an employee of the lender who is not a specified employee; (b) an employee, or an employee’s spouse or common-law partner, buying a dwelling to live in; (c) an employee buying previously unissued fully paid shares of the corporation or a related corporation, to be held for the employee’s own benefit; and (d) an employee buying a motor vehicle used in the duties of the office or employment.
Each also needs, under (e), that it is reasonable to conclude the loan came “because of the employee’s employment and not because of any person’s share-holdings”, and under (f) that at the time “bona fide arrangements were made for repayment of the loan or debt within a reasonable time”.
The owner-manager’s problem is (a) plus (e). Under ITA 248(1) a specified employee is an employee who is a specified shareholder or who does not deal at arm’s length with the person, and a specified shareholder owns, directly or indirectly, at any time in the year, “not less than 10% of the issued shares of any class of the capital stock” of the corporation or a related corporation. A 10% owner is outside carve-out (a) entirely, and for (b), (c) and (d) still has to clear the test in (e).
The repayment exit, and the condition on it
Under 15(2.6), 15(2) does not apply “to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments”. The clock runs from the end of the lender’s taxation year, not from the date of the loan.
The second half of that sentence matters as much as the date. ITA 20(1)(j), which gives a deduction in the year of repayment for “such part of any loan or indebtedness repaid by the taxpayer in the year as was by virtue of subsection 15(2) included in computing the taxpayer’s income for a preceding taxation year”, carries the same condition that the repayment was not part of a series. Meeting the date is necessary but not sufficient, and one condition gates both halves: fail it and the inclusion stands and the deduction does not arrive. Both provisions say only that the repayment must not be part of a series of loans or other transactions and repayments, and both put it on the taxpayer to establish, “by subsequent events or otherwise”, that it was not.
When 15(2) does not apply, ITA 80.4(2) takes over: a benefit at the prescribed rate on the outstanding balance, less interest paid within 30 days of year end. Once 15(2) has included the loan in income, 80.4(3)(b) stops a double count.
Case B: the same $100,000, two routes
You take $100,000 from your own corporation on 1 March 2027. The corporation’s taxation year ends 31 December. Other income is $150,000.
| Route 1: repaid by 31 December 2028 | Route 2: outstanding on 31 December 2028 | |
|---|---|---|
| Rule that applies | 15(2.6), so 80.4(2) | 15(2) |
| 2027 | $2,515.07 benefit (306 days of 365) | $100,000.00 included in income |
| 2028 | $3,000.00 benefit (full year at 3%) | |
| Income total | $5,515.07 | $100,000.00 |
| Tax, stacked on $150,000 | $2,480.10 | $47,494.40 (average 47.49%) |
Data as of 5 November 2026; Route 1 assumes no series. Route 2 puts income 18.1 times larger and tax 19.2 times larger than Route 1, a difference of $45,014.30.
The tax that does not come back
The 20(1)(j) deduction looks like a full reversal. It is not. The inclusion is stacked on top of other income, taking it from $150,000 to $250,000, and costs $47,494.40 in tax, 47.49% of the amount. The deduction in the repayment year comes off income, taking it from $150,000 down to $50,000 through lower brackets, and it is worth $34,309.87, or 34.31%.
| Amount | |
|---|---|
| Tax on the 15(2) inclusion | $47,494.40 |
| Tax recovered through 20(1)(j) | $34,309.87 |
| Permanent cost | $13,184.53 (13.18% of the loan) |
The inclusion is taxed at the top of the bracket stack and recovered at the bottom. The gap closes only where income in the repayment year is high enough that the deduction comes off the same brackets the inclusion went on. In this worked case, with $150,000 of other income in each year, it does not.
The investor’s half: 80.5 opens a door that is shut twice
If you invest what an employer lent you, the benefit may be deductible. ITA 80.5 says the 80.4 benefit “shall, for the purposes of subparagraph 8(1)(j)(i) and paragraph 20(1)(c), be deemed to be interest paid in, and payable in respect of, the year by the debtor pursuant to a legal obligation to pay interest on borrowed money.” That is a deeming, not a conclusion. Whether borrowed-money interest is deductible at all is a separate test, and when investment loan interest is deductible sets out what 20(1)(c) requires.
Case C: a $100,000 interest-free employer loan carries a benefit of $3,000.00 at 3%, and the tax on it at $150,000 of other income is $1,349.09.
| Where the money goes | 20(1)(c) deduction | Net cost of the benefit |
|---|---|---|
| Securities in a non-registered account, where the 20(1)(c) test is met | $1,349.09 | $0.00 |
| A registered plan contribution | $0.00 | $1,349.09 a year |
Data as of 5 November 2026. The first row is a wash only where 20(1)(c)(i) is met, which covers “borrowed money used for the purpose of earning income from a business or property (other than borrowed money used to acquire property the income from which would be exempt or to acquire a life insurance policy)”.
On our reading of the provisions, a registered-plan contribution fails that test on its own terms, because the income from the property would be exempt. ITA 18(11) then closes the door a second time, opening “Notwithstanding any other provision of this Act” and denying a deduction under 20(1)(c) and four neighbouring paragraphs for borrowed money used for the purpose of paying an RRSP premium (b), making a contribution into an RESP (h), to an RDSP (i), “making a contribution under a TFSA” (j), and “making a contribution to a FHSA” (k). This is our reading of the provisions, not a CRA position.
The 30-day payment takes the benefit to zero
Because 80.4(1)(c) subtracts interest actually paid “not later than 30 days after the end of the year”, paying the full 3% on a $100,000 loan by 30 January, which is $3,000.00, takes the benefit to $0.00. Which way that trade runs depends on the deduction above. Paying $3,000.00 in cash to remove a benefit the tax on which is $1,349.09 costs more than it saves, unless that interest is itself deductible under 20(1)(c), in which case the two sides net out. ITA 74.5(2)(b) gives a spousal loan the same 30-day grace.
Conclusion
The same 3% does two different jobs. On an employer loan it sets an imputed benefit that, for a home purchase loan, can only be capped down, and that a payment by 30 January erases. On a corporate loan that 15(2) catches, the exposure is the principal, and in Case B the deduction on repayment returns $34,309.87 of the $47,494.40 paid, leaving $13,184.53 gone for good. The lender’s year end, not the loan date, sets the repayment clock, and the series condition sits on both the exception and the deduction.
This article is for informational and entertainment purposes only and does not constitute financial, tax or legal advice. The figures are illustrations on stated assumptions, and your own position depends on your facts. Speak to a qualified tax professional before arranging a loan.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. The two loan regimes are quoted from the consolidated Income Tax Act on Justice Laws, retrieved November 5, 2026, consolidation date modified November 2, 2026: section 80.4 for the employment and shareholder loan benefits, the but-for test in 80.4(1.1), the exceptions in 80.4(3), the home purchase loan rate cap in 80.4(4), the five-year deemed new loan in 80.4(6) and the definitions in 80.4(7); section 80.5 for the deeming of the benefit to be interest paid; subsection 6(9) and subsection 15(9) for how the deemed benefit enters income; subsection 15(2) for the inclusion of the principal, 15(2.4) for the employee carve-outs and 15(2.6) for the one-year repayment exception; paragraph 20(1)(c) and paragraph 20(1)(j); subsection 18(11); and the definitions of specified employee and specified shareholder in subsection 248(1). The rate itself is paragraph 4301(c) of the Income Tax Regulations. The spousal comparison is subsection 74.5(2). The quoted use of the rate is from the Canada Revenue Agency’s Q4 2026 prescribed interest rates announcement. The rate for the first quarter of 2027 is our own calculation under paragraph 4301(a)(i) from the two Government of Canada treasury bill auctions held in October 2026, because the Canada Revenue Agency has not published that quarter. All dollar figures are our own arithmetic for an Ontario resident on the 2026 rate card, from CRA’s current year tax rates and income brackets and CRA T4032ON, Payroll Deductions Tables, Ontario, January 2026: federal and Ontario brackets, the Ontario surtax and the basic personal amounts, with the basic personal amount as the only credit and income tax only.
