Are Loans Taxable in Canada?

Most loans are not considered taxable income in Canada because you are receiving money that you are required to repay.

Taking out a personal loan, mortgage, auto loan or line of credit does not normally create income tax simply because you received the borrowed money.

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What Types of Loans Are Usually Not Taxable?

Borrowing money through common lending products generally does not count as taxable income.

Examples include:

• Personal loans
• Mortgages
• Auto loans
• Lines of credit
• Student loans
• Credit card borrowing
• Payday loans

You receive the money temporarily and have an obligation to repay it.

What Happens If a Loan Is Forgiven?

Tax treatment can change if you no longer have to repay the debt.

For example, the CRA states that when an employer forgives all or part of an employee loan, the forgiven amount is generally included in the employee's income for that year.

Different debt forgiveness rules can apply depending on who borrowed the money and why, so a large forgiven debt may be worth discussing with a tax professional.

Are Employer Loans Taxable?

The loan itself is not necessarily taxable, but an employee can receive a taxable benefit if an employer provides an interest-free or low-interest loan because of their employment.

The CRA generally calculates the benefit based on prescribed interest rates and any interest the employee actually paid.

This is different from receiving a normal loan from an independent bank at market terms.

Are Business Loans Taxable?

Receiving a business loan does not generally mean the borrowed amount becomes business income.

However, how you use the loan can affect your taxes.

For example, the CRA allows businesses to deduct certain interest costs when borrowed money is used to earn business income, subject to applicable restrictions.

The loan principal itself is not normally a deductible business expense when you repay it.

Is Interest on a Personal Loan Tax-Deductible?

Usually not when the money is borrowed for personal purposes.

Interest may be deductible when borrowed money is used for the purpose of earning income from a business or property, provided the CRA's requirements are met.

For example, interest on money borrowed solely for personal purchases would generally not qualify.

Are Student Loans Taxable?

Receiving a student loan does not normally create taxable income.

Certain government student loan interest may also qualify for a federal tax credit, depending on the loan and current tax rules.

That is separate from whether the original borrowed amount is taxable.

Are Mortgage Funds Taxable?

No.

When a lender provides mortgage financing to purchase a home, that money is borrowed rather than earned.

The mortgage proceeds themselves therefore do not normally become taxable income.

Tax considerations may arise later if the property produces rental income, is sold for a gain or the borrowed money is used for another income-producing purpose.

Do You Pay Tax When You Repay a Loan?

No.

Repaying the principal generally does not create taxable income or a tax deduction.

You are simply returning borrowed money to the lender.

Interest is a separate issue and may or may not be deductible depending on what the borrowed money was used for.

When Can a Loan Create Tax Problems?

Pay closer attention when a loan involves:

• Debt forgiveness
• Employer-provided loans
• Shareholder loans from a corporation
• Business borrowing
• Borrowing for investments
• Related-party transactions

For an ordinary personal loan from a lender, however, the basic rule is straightforward: borrowing money is generally not taxable income because you have to pay it back.