If you have an employee and you provide the employee with a loan at little or no interest, the employee must include them as a table income in their annual income tax return. This benefit is calculated on the loan at a government provided prescribed rate minus the interest actually paid on the loan within the year or 30 days after year end.
However, there’s special rule applies when you provide your employee with low or no interest loan to a purchase a home to work in a new location. The table portion of the benefit could be eliminate partially or even totally by the special rule. In general, this special deduction will entirely offset the taxable benefit arising from low-interest or interest free loans of $25,000 or less. This deduction applies on a 5 years period starting on the date of the loan is made.
Special rules also apply in you provide any of your employees with a loan to purchase a new home. It is not necessary for the employee to move to a new work location to qualify under this rule. This borrowed money has to be used to either purchase or refinance the debt on the employee’s home. The benefit from such loans is calculated by applying either the prescribed rate at the time the loan is granted or the prescribed rate for the particular quarter, whichever is lower. A new base rate on the loan will be established every five year.
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Note: This article is not a substitute for professional advice, which you should seek when you are considering important action.
Author: Saurav Paul