Since they received the money while they were an employee, and didn't pay it back, it needs to go on a T4 slip, and you're going to be on the hook for the related CPP (or QPP), EI, WCB, EHT, etc.  Basically, you need to create a 'paycheque' for them that shows them paying back the loan and getting enough income to offset the related deductions and make the net cheque zero.  If you have a 'bonus' paycode set up, I usually use that code.  I would turn off tax deductions for them before doing this 'paycheque', so you aren't also stuck helping them pay their income tax.

I usually recover the full loan, and then just play with the bonus amount until the net cheque is just a few cents over zero - and then I manually enter enough tax to take the net cheque exactly to zero.

Thank you for this input. Very helpful, however a huge pain and I will not be giving out loans any longer!

Thanks for your answer. It is useful for me.