Canadian Tax Principles, 2022-2023 -Edition

Loans to Employees

Trisha Frude has been employed for over 20 years with a large public company. It is the policy of this company to make interest-free loans of up to $250,000 to facilitate employees with more than 10 years of service in purchasing a new home.

After living in a rental property all her working life, Trisha would like to purchase a residence. She has located an attractive property within biking distance of her office. In order to comfortably pur-chase this property, she needs a loan of $225,000.

Trisha has been approved for a five-year closed mortgage at a rate of 4.8% from her bank. She also applied for a loan of this amount on an interest-free basis from her employer. After receiving her application, her employer has agreed to extend a five-year, $225,000 loan on an interest-free basis in lieu of a (well-deserved) raise.

The companys accountant will calculate the after-tax cost of providing the loan. Her employer will offer Trisha the alternative of additional salary that has the same after-tax cost to the company of the loan.

The company is subject to tax at a combined federal and provincial rate of 27%. When funds are available, the company has alternative investment opportunities that earn a pre-tax rate of 11%. Because of Trishas current high salary, any additional compensation will be taxed at a combined federal and provincial rate of 49%.

Assume that the prescribed rate throughout the current year is 2% and that the loan was made on January 1 of the current year.