An interest-free loan used for personal purposes by your child poses no tax problems in Canada. In the USA foreign lenders are not taxed imputed interest on interest free loans. However, In Canada if the interest‑free loan is used by your child for investment purposes, there is a special attribution rule in the Income Tax Act that may apply (subsection 56(4.1)). But, this is not case as it was for a home. So, you do not report a loan on form 3520 in the USA as it is NOT forgiven. In Canada no need to report on T1135 personal loans that are not investment or business which have no interest income. If the lender dies, then the loan becomes forgiven. Best way to deal with this death situation is to treat as an advance on inheritance if possible that way no tax consequences. Please note that the laws change as time goes on. This means that in the future there could be tax consequences. So, in years ahead when this is read what I wrote only applies to now, not the future. Every question has to be addressed at that time and my comment was only for general purposes and not meant to be used specifically for different circumstances where the facts obviously being different can result in tax consequences either in Canada and or the USA. Please feel free to contact me with your specific facts for an accurate resolution to your issues.
