Income Tax Folio S3-F1-C2 Deemed Interest Benefit on Shareholder Loans and Debts, April 10, 2025

Identification of loan or debt

• 2.9 Revolving credit, such as a line of credit or a credit card, is generally considered to be in the nature of a loan or debt, so that s. 80.4(2) can apply to the revolving credit.
• 2.10 In the absence of a written agreement, there must be convincing evidence that a loan or debt exists. Where a shareholder receives property from a corporation and there is no debtor-creditor relationship created, ss. 15(2) and 80.4(2) will not apply, but s. 15(1) may apply.

Continued application notwithstanding changed relationship

2.32 Once a loan becomes subject to the provisions of section 80.4, it remains subject to those provisions for all tax years as long as any part of it remains unpaid. Therefore, even if there is a subsequent change in relationships or conditions that existed at the time the loan was received, subsection 80.4(2) will continue to apply. For example, a loan received by reason of shareholdings can continue to be subject to subsection 80.4(2) even if the recipient of the loan ceases being a shareholder.

Deemed accrual during part of year

• 2.33 A loan that is outstanding during only part of a borrower's taxation year can give rise to a s. 80.4(2) deemed interest benefit for that portion of the year.

Return refiling

• 2.34 Where a borrower did not include a loan in income because it was expected that the s. 15(2.6) exception would apply, and an interest benefit was included under s. 80.4(2) in the borrower's tax return for the year in which the loan was received, then if the loan in fact is not repaid within the s. 15(2.6) time period, the borrower should amend the tax return for that year to remove the deemed interest benefit amount from income and to include the loan amount in income.

No netting without set-off

• 2.37 Generally, a deemed interest benefit under s. 80.4(2) cannot be avoided by simply netting an amount due to a shareholder with an amount due from that shareholder, given that a loan is only considered to no longer exist after its actual cancellation or extinguishment.

Third-party interest payments not accommodated

• 2.14 The exception in s. 80.4(3)(a) does not apply if any party, other than the borrower, made or was required to make any interest payments on the loan.

Overview re s. 80.4(3)(c)

• 2.18 In general terms, the exception in paragraph 80.4(3)(c) applies for up to 15 years where an employee ownership trust borrows funds from a qualifying business for the purpose of purchasing the qualifying business pursuant to a qualifying business transfer. The loan must meet the conditions outlined in subsection 15(2.51) in order for this exception to apply.

Continued accrual on non-forgiven portion

• 2.16 Where part of a loan is forgiven, s. 80.4(3)(b) does not obviate the requirement to compute the deemed interest benefit on any portion of the loan that remains outstanding.

Whether loan is received qua employee or qua shareholder

• 2.22 Factors that may indicate that a loan was received by a shareholder-employee from the corporation because of their shareholding include:
  • Loans were only made available to shareholders.
  • The loan was made under more favorable terms than for loans provided to other employees.
  • The loan was provided to a shareholder who could significantly influence the business decisions of the corporation.
  • Its amount was very significant relative to the corporation's retained earnings. The loan was for a significant amount, but no security was required.
• 2.23 Factors that may indicate that such a loan was received because of the individual's office or employment include that:
  • The loan was provided on the same terms and conditions as loans provided to other employees who were not shareholders.
  • Where the shareholder was the only employee of the corporation, the individual could establish that employers of a similar size provided loans of a similar amount under similar terms and conditions to employees with similar duties and responsibilities who were not shareholders.

S. 80.5 deduction potentially can be accessed by non-resident carrying on business in Canada

• 2.43 Where s. 80.4(2) results in a deemed interest benefit to a non-resident borrower, s. 80.5 applies to deem the amount of the benefit to be interest paid in, and payable in respect of, the year pursuant to a legal obligation to pay interest on the borrowed money for purposes of s. 20(1)(c). Accordingly, a deduction under s. 20(1)(c) may be claimed where the proceeds of the loan were used to earn income in Canada that is taxable under Part I.