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Employee loans at no interest, or at less than the CRA’s prescribed rate, create a taxable benefit for the employee. The prescribed rate is 3% for the third quarter of 2026, and the CRA lists 3% again for 1 October to 31 December 2026. Your books have to show both the loan itself and that benefit.
Where should an employee loan sit in your books?
A loan to an employee is an asset, not an expense. Give it its own account, separate from ordinary receivables, and open a sub-account for each person. That way each person’s balance is theirs alone, and nobody digs through invoices to find it.
Keep the signed agreement with the ledger. It should show the amount, the date, the interest rate (even if it’s zero), and how the money comes back. Payroll deductions are the usual route, so the payroll system and the loan account need to agree every pay period. A quick reconciliation each month catches a missed deduction before it becomes a surprise at year end.
If the loan is written off, that’s a different treatment again, and it’s outside what this page covers. The short version is that the written-off amount is income for the employee, so talk to your payroll provider before anyone says “forget it”.
How is the taxable benefit worked out?
Take the interest you would have charged at the CRA’s prescribed rate on the balance outstanding, then subtract any interest the employee actually paid. The remainder is the benefit. If the employee pays interest at the prescribed rate or higher, the benefit is nil.
The CRA sets the rate each quarter, so the calculation isn’t a one-off. Here’s how the fourth-quarter page words it.
The interest rate used to calculate taxable benefits for employees and shareholders from interest free and low-interest loans will be 3%.
Interest rates for the fourth calendar quarter, canada.ca
Rates for 2027 hadn’t been published at the time of writing, so look at the CRA’s prescribed interest page at the start of each quarter and keep a small table in your file.
| Quarter | Prescribed rate for employee and shareholder loans |
|---|---|
| Third quarter 2026 (1 July to 30 September) | 3% |
| Fourth quarter 2026 (1 October to 31 December) | 3% |
| 2027 quarters | Not yet published |
What does a $20,000 interest-free loan look like?
Say you lend an employee $20,000 with no interest, repaid in 24 equal monthly payments. The personal loan calculator puts each payment at $833.33 when the rate is zero. At 3%, the same loan would cost $859.62 a month.
Now the benefit. If the prescribed rate stays at 3% for the whole first year, the interest on the shrinking balance is about $462.50, since the balance falls to $10,000 by month twelve. Charge nothing, and $462.50 is the benefit. Charge 3% and it’s zero.
How much does the employee owe? For a person with $70,000 of other income in Ontario, the extra $462.50 costs roughly $137 in tax. So an interest-free loan is worth a real amount to the employee, but not a lot. It’s cheaper for them than the sticker interest, and it’s still taxed. For Amrit, a delivery driver in Surrey borrowing $20,000 for a used van, that’s a ballpark of a dozen bucks a month in tax on the perk.
The take-home pay calculator is useful for seeing how the loan repayment deduction leaves the paycheque, and the payroll deductions calculator covers the source deductions on the rest of the pay.
What if the rate changes mid-loan?
Then you work out each quarter on its own, using the rate that applied to it. This is where spreadsheets go wrong. One rate typed in a cell for the whole year will be wrong the moment the CRA changes the number. Put the rate in a table by quarter and look it up.
How the benefit gets onto the employee’s slip and into your payroll remittances is a payroll question. Read the CRA’s payroll guidance or ask whoever runs your payroll before the year ends, and don’t leave it for the last week of December.
Should you charge interest at all?
Often that’s the simplest fix. If you charge at least the prescribed rate, the benefit is nil and the paperwork shrinks to one repayment schedule. The employee pays a bit of interest, you record it as income, and nobody has to calculate a quarterly benefit. If you choose a rate below the prescribed one, you’re back to working out the shortfall each quarter. Zero interest is a kind gesture, but it creates the most bookkeeping.
What mistakes and limits should you watch?
Some loans have their own rules: loans to buy a home, loans to relocate, loans to buy shares in the employer. Those rules aren’t covered on this page, and the outcome can be quite different. Loans to shareholders who aren’t employees also have separate consequences. Don’t apply what’s here to those without checking.
The common bookkeeping slips are simple. A loan booked as wages. Repayments that stop when someone goes on leave, with no note in the file. A loan that’s forgiven quietly. Each of those changes the tax picture.
Our sources
The 3% prescribed rates for the third and fourth quarters of 2026 come from the Canada Revenue Agency‘s quarterly interest rate pages, read on 30 September 2026. The loan payments come from our loan maths, and the tax figure uses 2026 federal and Ontario rates for one worked case.
Frequently asked questions
What is the prescribed rate for employee loans in 2026?
The CRA lists 3% for the third quarter (1 July to 30 September) and 3% for the fourth quarter (1 October to 31 December). It sets the rate again each quarter.
Is an employee loan an expense?
No. It is an asset until repaid, so give it its own account and a sub-account for each employee.
How is the taxable benefit calculated?
Interest at the prescribed rate on the outstanding balance, minus any interest the employee actually paid.
Does the employee pay tax on an interest-free loan?
The interest they would have paid at the prescribed rate is a taxable benefit, so yes, they are taxed on that amount, not on the loan itself.
Are home loans and relocation loans treated the same way?
Not necessarily. Those loans have their own rules, which we did not confirm here, so read the CRA guidance before relying on this page.
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