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Redirecting Income

First Posted: June 19, 2009

By Bennett Gold LLP, Chartered Accountants

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Employee Home Purchase Loans

If you took out a loan from your employer to buy a house, you can get significant tax savings by renewing the loan at the current low prescribed rate.

Generally, when you take out a low-interest or interest-free loan from your employer, the money is considered a taxable benefit from employment. The benefit is set at the prescribed interest rate minus any interest you pay during the year. The benefit can fluctuate as the prescribed rate changes.

But if the loan is used to purchase a home, the interest rate applied in calculating the benefit is capped for five years at the prescribed rate at the time of the borrowing. At the end of that period, the latest prescribed rate is applied for the next five years of the loan. So if you take out a home purchase loan from your employer now, the interest rate benefit won't exceed one per cent for the next five years, regardless how high interest rates climb.

If you already have a home purchase loan, you can arrange to replace it. Under the Income Tax Act a home purchase loan includes any money borrowed to repay a previous loan. As long as you ensure that the old loan is paid off and a new loan is taken out, the interest rate will be at the prescribed rate when the substitute loan goes into effect.

Talk to your financial advisor. To maximize the tax benefits of these strategies they must be arranged properly. And keep in mind that the home purchase loan strategy works only if you get the loan because you are an employee, not because you are a stockholder. If the loan is provided because of your shareholder status, the CRA will want to include the entire amount of the loan in your income.

Is Mortgage Refinancing a Good Strategy?

With interest rates declining and the Bank of Canada's benchmark rate pegged at an historic low of 25 basis points and likely to stay there until June 2010, you may be thinking it's a smart move to refinance your mortgage.

It could be, but the deciding factor should be the trade-off between how much it will cost to break out of your current mortgage and how much you would save in interest over the term of a new loan.

Breaking an existing mortgage involves paying the greater of three month's interest or the interest rate differential (IRD), a penalty for early repayment outside the loan's normal terms. Typically this is calculated as the difference between the current interest rate and the rate for the remaining term multiplied by the principal outstanding and the balance of the term.

For refinancing to be worth your while, the interest saved with your new home loan would have to exceed the IRD.

Talk to your financial advisor about whether refinancing your mortgage would produce savings and fit in with your long-range financial goals.

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