Beneficial Loans to Employees
Hugo P. Matre
“Beneficial loans to employees” designates interest-free loans or loans at less
than a marked rate of interest received by reason of employment. For tax
purposes it does not matter whether the employee has a regular employment or
not, as long as the benefit is received by reason of labour or services rendered.
Loans comprises in principle any form of credit.
Beneficial loans to employees transfers an economic value (the time value of
capital) to the borrower which the lender renounce. This article discusses how
this benefit in kind should be treated for tax purposes both on the
lender/employer’s hand and on the borrower/employee’s hand.
The general rule as to the taxation of income from employment is that an
employee’s total labour compensation includes all benefits received in
connection with the employment, The General Tax Act (GTA)1 Sec. 5-1
paragraph 1 and Sec. 5-10. The general concept of income is not based on
characteristics of the payment or manner in which it was derived. The total
compensation may include a money wage and non-wage benefits as e.g.
conventional fringe benefits. Conventional fringe benefits, like beneficial loans
linked to the job, are often named benefits in kind.
Taxable benefits in kind must be valued to enter the tax base. The borrower
can not convert the benefit of a beneficial loan into money. It may be argued that
no realisable value is received by an employee receiving a beneficial loan, and
therefore no taxation should be suffered by an employee receiving such a loan
from his employer or otherwise by reason of his employment. However, the
general rule in relation to the taxation under GTA Sec 5-12 paragraph 2 and Sec
5-3 of benefits in kind received by reason of employment is that the value of
such benefits is to be taken as the marked value, namely, the value a non-
employee would pay for similar goods or services. Therefore benefits in kind
may be taxable even if