Canadian Prescribed Interest Rates

Shareholder Loans  |  Spousal Loans

By L.Kenway BComm CPB Retired

Updated December 11, 2024  |  Edited July 24, 2024  |  Revised June 29, 2029  |  Originally Published on Bookkeeping-Essentials.com in 2011

Prescribed Rates | PLOI Rates | Loans to SH | Spousal Loans | Tip

Prescribed rates can be used on loans to family members to split income. Spousal loan interest payments are due each year by January 30 (not January 31) or attribution rules kick in. The loan becomes null and void and investment income reverts back to the lender if the interest payment is not paid on time.

Bank of Canada interest rates announcements for 2024 are January 24 (5%), March 6 (5%), April 10 (5%), June 5 (4.75%), July 24 (4.5%), September 4 (4.25%), October 23 (3.75%), December 11 (3.25%). 

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Help getting all your ducks in a row

Quarterly Prescribed Interest Rates

Canadian prescribed interest rates are the rates used to calculate:

• interest on amounts owed to the Canada Revenue Agency (CRA);
• the refund amount CRA pays when they owe you or your corporation;
• the amount to charge on taxable benefits such as interest-free and low-interest rate loans for shareholders, spouses, and employees.

Overdue and ovepaid taxes includes income taxes, CPP contributions, EI premiums, GST/HST, Excise tax / duties ... basically any kind of federal tax.

Prescribed interest rates are released quarterly by the CRA.

The prescribed rate is based on the average yield of Government of Canada three-month Treasury bills auctioned in the first month of the preceding quarter, rounded up to the next whole percentage according to section 4301 of the Income Tax Regulations.

Loans to Shareholders / Employee Loans

STOP ... before you write yourself that cheque or take that cash ...

The rules around shareholder loans are governed primarily by Canada's Income Tax Act (ITA). There are very specific rules when a corporation loans money to its shareholders who own more than 10% of the shares and their family members. YOU need to be careful that money you remove from the company is not at risk to be taxable. If the money is not tagged as salary or dividends, it's likely you've just given yourself a shareholder loan which is a taxable benefit.

If you and other family members own less than 10% of the corporation, your transactions are treated the same as if you were an employee.

General Taxability Rule: Generally, when a loan is made by the corporation to a shareholder, it results in a taxable benefit for the shareholder. The amount received must be included in the recipient's income in the year the money was received. When the loan is repaid, it can be deducted from income in the year of repayment. Avoid missing the repayment terms as there are unwanted tax consequences.

However, there are exceptions to this rule*.

1. The One Year Rule: If the loan is repaid within the year following the corporation's year end, then the loan does not have to be included in income. The loan cannot be a series of small borrowings and repayments for this rule to apply. And no, you can't repay the money at yearend and borrow it again shortly after. This would be viewed as a series of loans. The Tax Guy - Dean Haley CPA refers to this as the one year rule.

For example, let's say your corporation has a December 31 year-end, and you as a shareholder borrowed $15,000 in 2024 from the corporation. No taxable benefit will occur if you repay the loan by December 31, 2025.

2. The Lenders Rule: If the loan was related to normal business activity, it is not considered a shareholder loan provided there are actual repayment terms in place where interest is charged at standard rates. The terms must be met and maintained. The Tax Guy  refers to this as the lenders rule.

For example, there must be a written agreement between the shareholder and the corporation. The agreement should state the amount of the loan, the prescribed interest rate in effect**, and the time frame the shareholder will repay the loan. The shareholder should make actual payments with regards the loan from their personal accounts and not payment through journal entries. This makes it clear there was a financial obligation and it was being met.

Recent Legislative Change That Affects The Lending Rule: Bill C-47 introduced a new restriction to the Lenders Rule exception. As of 2023, for a corporation to qualify for this exception, at least 90% of its total loans must be to arm's-length borrowers. This applies to new loans made after 2022 and to the outstanding portions of pre-2023 loans as of January 1, 2023. Small business owners should be aware that this change may limit their ability to use the Lenders Rule exception for shareholder loans.

3. The Home Purchase Loan Rule (formerly The Principle Residence Rule): If the shareholder is also an employee (as most small business incorporated owners are), a loan can be advanced due to employment and it will not be considered income (it is tax free). It could be to purchase a principal residence, a vehicle to be used for business purposes or new shares in the corporation. As with the lenders rule, payments must be in place for repayment and maintained. The Tax Guy refers to this as the principle residence rule (now the home purchase loan rule).

The loan must attract a fair interest rate that any arm’s length borrower would pay for a similar loan. For example, if the corporation gives an advance to a shareholder-employee to purchase a principal residence and they are charged an interest equivalent to the prescribed rates**, this would not be counted as a taxable benefit.

**Important note: The prescribed interest rate that applies to a loan is the rate that was in effect at the time the loan was made. This rate remains fixed for the duration of the loan, regardless of any subsequent changes to the prescribed rate by the CRA in following quarters. For clarity, the loan's interest rate does not fluctuate with the CRA's quarterly updates to the prescribed rate. This 'locking in' of the interest rate at the time the loan is made provides some predictability for both the lender (the corporation) and the borrower (the shareholder or employee). It allows for easier financial planning and avoids the complexity of constantly adjusting interest calculations. However, if the loan is repaid and a new loan is taken out, the new loan would be subject to the prescribed rate in effect at that time.

4. New CRA Administrative Policy Update: As of January 1, 2023, the CRA has introduced new guidelines regarding low-interest or interest-free loans received because of employment. This new policy primarily affects the 'General Taxability Rule'. It doesn't replace the existing rules but rather adds another potential exemption.

This change affects small, short-term loans meeting specific criteria. If the criteria is met, there may now be no need to report a taxable benefit. This exemption applies when:

• The total amount of all loans received is $10,000*** or less per calendar year; AND
• The term of the loan(s) is 60 days or less; AND
• The loan is not received because of shareholdings.

***Important note: For loans that span two calendar years, the CRA considers the full loan amount as part of the $10,000 threshold for the year in which the loan was received. This means even if a loan extends into the following year, its entire amount counts towards the reporting threshold in the initial year.

As you can see, this new policy adds another layer of complexity to the already intricate rules around loans to shareholders and employees.

Employer loans to employees are usually an employee benefit. The value of any kind of benefit must be added to your employment income, with some exceptions for home purchase loans, home relocation loans, investment loans, and loans to buy a vehicle. The Tax Guy says "the government wants to discourage employers from substituting tax-free fringe benefits for actual cash compensation to avoid income tax." 

These rules apply when the corporation lends money to the shareholder/employee.

As these are very specific rules with regards the loan transactions, it's prudent to check in with your accountant before you write yourself that cheque. If you structure the loan agreement incorrectly ... or not at all ... the cost of the loan could be considerable. You may also want to read: 

• CRA Website: Calculate payroll deductions and contributions> Loans and employee debt discusses CRA's new administrative policy that came into effect in January 2023.
• CRA bulletin IT-421R2 Benefits to individuals, corporations and shareholders from loans or debt (Archived) --- discusses section 80.4(2) Benefits Arising by Virtue of Shareholdings; and
• CRA bulletin IT-119R4 Debts of Shareholders and Certain Persons Connected With Shareholders (Archived) are good resources --- discusses subsection 15(2) Shareholder Debt and Certain Persons Connected With Shareholders (also discusses 15(1)).

*Reference: Dean Haley CPA's article titled Shareholder Loans and Your Private Corporation; Doane Grant Thornton June 23, 2023 tax alert What does Bill C-47 mean for you or your business?

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