Series 3: Property, Investments and Savings Plans

Folio 1: Shares, Shareholders & Security Transactions

Chapter 1: Shareholder Loans and Debts

Summary

Shareholders are generally taxable on amounts received from a corporation. Subsection 15(2) provides that a person or partnership receiving a loan or incurring a debt in a tax year by virtue of shareholding is generally required to include the amount of the loan or debt in income for the year. This Chapter provides a general discussion of the circumstances in which subsection 15(2) can apply, who the provision applies to, and the timing of the income inclusion.

The Act provides a number of specific exceptions to subsection 15(2), which are discussed in this Chapter. These exceptions include certain loans to shareholder-employees, and loans repaid within a certain period of time. The discussion of the exception for loans repaid within a certain period of time includes comments on the effect of a series of loans and repayments.

The Chapter discusses the deductibility of repayments made in a tax year after a loan or debt has been included in a taxpayer’s income. A general discussion of the tax implications where the person receiving the loan or incurring the debt (directly or through a partnership) is a non-resident of Canada is also provided. The Chapter does not, however, include a discussion of the tax consequences resulting from loans or debts that are subject to the upstream loan rules in subsections 90(6) to (15). The Chapter also does not discuss tax consequences relating to foreign affiliate financing or other international intra-group financing arrangements.

Shareholders who have all or part of a loan or debt settled or extinguished without fully repaying the outstanding balance should refer to the section in this Chapter entitled Forgiven amounts.

The CRA issues income tax folios to provide a summary of technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, folios are used primarily by tax specialists and other individuals who have an interest in tax matters. While each paragraph in a chapter of a folio may relate to provisions of the law in force at the time it was written (see the Application section), the information provided is not a substitute for the law. The reader should, therefore, consider the Chapter’s information in light of the relevant provisions of the law in force for the particular tax year being considered.

The CRA may have published additional guidance and detailed filing instructions on matters discussed in this Chapter. See the CRA Forms and publications web page for this information and other topics that may be of interest.

Discussion and interpretation

Application of subsection 15(2) – general comments

1.1 In some cases, a person or partnership receiving a loan or incurring a debt in a tax year by virtue of shareholding may be required to include the amount of the loan or debt in income for the year under subsection 15(2).

1.2 Subject to the exceptions discussed at ¶1.19 to 1.85, subsection 15(2) applies where:

1. a loan was received or a debt was incurred by a person or partnership;
2. that person or partnership was:
   
   1. a shareholder of a particular corporation;
   2. connected with a shareholder of a particular corporation; or
   3. a member of a partnership, or a beneficiary of a trust, that was a shareholder of a particular corporation; and
3. the loan was received from or the debt was incurred to:
   
   1. the particular corporation;
   2. any corporation related to the particular corporation; or
   3. a partnership of which the particular corporation or a related corporation was a member.

1.3 In this Chapter, a person or partnership referred to in ¶1.2(b) is referred to as the borrower or debtor, depending on the circumstances. A corporation or partnership referred to in ¶1.2(c) is referred to as the lender or creditor, depending on the circumstances.

1.4 Subsection 15(7) provides that subsection 15(2) applies regardless of whether the lender or creditor was resident in Canada or carried on business in Canada. The specific tax implications in situations where the debtor or borrower is a non-resident of Canada, are discussed at ¶1.88 to 1.98.

1.5 Section 251 provides the rules for determining when corporations are related. These rules are discussed in Income Tax Folio S1‑F5‑C1, Related Persons and Dealing at Arm's Length.

1.6 There are a number of exceptions to the application of subsection 15(2). These exceptions are discussed later in this Chapter, starting at ¶1.19.

Meaning of “person”

1.7 The term person is defined in subsection 248(1) for purposes of the Act and generally includes individuals and corporations. Subsection 104(2) deems a trust (a term defined to include an estate or succession) to be an individual in respect of the property of the trust for purposes of the Act. Therefore, when the term person is used in this Chapter, it includes individuals, trusts, and corporations.

Meaning of “connected with a shareholder”

1.8 Subsection 15(2.1) generally provides that a person is connected with a shareholder of a particular corporation if the person does not deal at arm's length with, or is affiliated with, the shareholder. There are two exceptions to this general rule. Under these exceptions, the following persons are not considered to be connected with a shareholder of a particular corporation for purposes of subsection 15(2):

• a foreign affiliate of the particular corporation; or
• a foreign affiliate of a person resident in Canada with which the particular corporation does not deal at arm's length.

Subsection 248(1) provides that the definition of foreign affiliate in subsection 95(1) applies for purposes of the Act. The subsection 95(1) definition of foreign affiliate therefore applies for the purposes of subsection 15(2.1).

1.9 A partnership is also considered to be connected with a shareholder of a particular corporation where the partnership does not deal at arm’s length, or is affiliated, with the shareholder.

1.10 See Income Tax Folio S1‑F5‑C1 for information on determining whether persons are dealing at arm’s length. Whether persons or partnerships are affiliated with each other is determined under section 251.1.

Loans and debts

1.11 Subsection 15(2) applies to loans and debts. Persons affected by subsection 15(2) may have loan accounts, drawings accounts, or other similarly named accounts within which various transactions are posted in the year. These transactions may include repayments as well as charges or drawings for, but not limited to, one or more of the following:

• loans;
• payments made to third parties by the corporation on behalf of a shareholder; or
• advances against future salaries, rents or anticipated dividends.

1.12 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. Subsection 15(2) can therefore apply to revolving credit.

1.13 The existence of a loan or debt may be established on the basis of a written agreement or other convincing evidence. Such evidence could include a corporate resolution outlining the terms of a loan or debt that is reflected in the financial statements of a corporation. In the absence of a written agreement or convincing evidence that a loan or debt exists, where a shareholder receives money or other property from a corporation and there is no debtor‑creditor relationship created, subsection 15(2) will not apply. However, in such a case, subsection 15(1) may apply. Subsection 15(1) generally requires a shareholder of a corporation to include in income the value of any benefit conferred on the shareholder by that corporation. An example of such a situation would be where a corporation pays a shareholder’s personal expenses and there is no agreement between the shareholder and the corporation for reimbursement. For information on subsection 15(1), see Interpretation Bulletin IT-432R2, Benefits Conferred on Shareholders.

1.14 The determination of whether a loan has been received or a debt incurred is not based on accounting entries. Accounting entries might not reflect the substance of a transaction. It is the substance of a transaction that must be considered. In determining the substance of a transaction, it is important to note that tax consequences arise from what taxpayers have actually done and not from what they intended to do or what they might have done.

1.15 The rules discussed in this Chapter generally apply in the same manner to loans and debts but for simplicity the discussion is based on how the rules apply to loans. However, the rules in subsection 15(2.3) apply differently to loans than to other types of debts that are not loans, so these differing rules are explained in ¶1.25 to 1.36. Debts that are not loans are also referred to in Example 7 for illustrative purposes.

References to a tax year

1.16 The tax year referred to in subsection 15(2) is the tax year of the borrower. The date a loan is made determines the tax year of the borrower in which the loan is included in income. Depending on the applicable provincial law, a loan may be considered to have been made when the funds are advanced, when the relevant documents are signed, or when the borrower otherwise becomes legally obligated to repay the amount owed to the lender.

1.17 Where the borrower is a partnership, the tax year referred to in subsection 15(2) is the fiscal period of the partnership.

Back‑to‑back shareholder loans

1.18 Subsections 15(2.16) to 15(2.192) provide rules relating to the application of section 15 and subsection 80.4(2) when loans are received as part of a back-to-back loan arrangement. In general terms, the rules are intended to ensure that subsections 15(2) and 80.4(2) are not avoided where debt funding is provided by a particular corporation or partnership to a borrower indirectly through one or more intermediaries. In very general terms, where the conditions set out in subsection 15(2.16) are met, subsection 15(2.17) deems that the particular corporation or partnership made a loan to the borrower for the purposes of sections 15 and 80.4, in an amount equal to the funding indirectly provided. A detailed discussion of the back‑to‑back loan rules is beyond the scope of this Chapter.

Exceptions to the application of subsection 15(2) – general comments and specific exceptions

1.19 Section 15 contains a number of exceptions to subsection 15(2). In general, the conditions that must be satisfied in order to qualify for an exception must be met at the time a loan is made. However, this general rule does not apply to the exception for pertinent loans or indebtedness (see ¶1.22) or to the exception in subsection 15(2.6) (see ¶1.71). Both of these exceptions have conditions that must be met within a specified period of time after the loan is made.

1.20 Where an exception to subsection 15(2) applies, another provision of the Act may still require that an amount be included in a taxpayer’s income in respect of a loan. For example, a low-interest or interest-free loan to a shareholder can result in a deemed interest benefit under subsection 80.4(2) if subsection 15(2) does not apply to the loan. For information on subsection 80.4(2), see Income Tax Folio S3-F1-C2, Deemed Interest Benefit on Shareholder Loans and Debts.

Where the borrower is a Canadian corporation or partnership

1.21 Subsection 15(2) does not apply if the person receiving a loan is a corporation resident in Canada. Subsection 15(2) also does not apply if a partnership receives a loan and all of its members are corporations resident in Canada.

Pertinent loans or indebtedness

1.22 Subsection 15(2) does not apply to a pertinent loan or indebtedness (PLOI). For the purposes of subsection 15(2), a PLOI is a loan that would otherwise be subject to subsection 15(2) but for which an election has been filed under paragraph 15(2.11)(d) and that meets all other conditions specified in subsection 15(2.11). Although exempted from the application of subsection 15(2), if a loan is a PLOI, it will be subject to the deemed interest income rule under section 17.1.

1.23 These rules for PLOI generally apply to amounts that become owing after March 28, 2012. More information on the tax rules for PLOI’s can be found on the Understanding interest page on the Canada.ca website.

Loans made between non-residents

1.24 Subsection 15(2.2) provides that subsection 15(2) does not apply to loans between non-resident persons. For the exception in subsection 15(2.2) to apply, both the lender and borrower must be non-residents of Canada at the time the loan is made.

Ordinary course of business loans

1.25 Subsection 15(2.3) provides that subsection 15(2) does not apply in respect of a loan or debt where, at the time the loan is made or the debt is incurred, bona fide arrangements are made for repayment of the loan or debt within a reasonable time, and:

1. in the case of a loan made before 2023, the loan is made in the ordinary course of the lender's ordinary business of lending money;
2. in the case of a loan made after 2022, the loan is made in the ordinary course of the lender's ordinary business of lending money (other than a business of lending money if, at any time during which the loan is outstanding, less than 90% of the aggregate outstanding amount of the loans of the business is owing by borrowers that deal at arm's length with the lender); or
3. in the case of a debt other than a loan, the debt arose in the ordinary course of the creditor’s business.

1.26 Where a loan is excluded from the application of subsection 15(2) on the basis that it meets the requirements described in (a) of ¶1.25, but a portion of the loan remains outstanding on January 1, 2023, that portion (the outstanding portion) will be treated as a separate loan:

1. that was made on January 1, 2023 in the same manner and on the same terms as the loan;
2. that must meet the requirements of subsection 15(2.3) (as described in b) of ¶1.25) in order to be excluded from the application of subsection 15(2); and
3. to which subsection 15(2.31), subsection 15(2) and all provisions of the Act relevant to the interpretation and application of subsection 15(2) apply.

1.27 For purposes of b) and c) of ¶1.26, where the outstanding portion does not meet the requirements described in b) of ¶1.25, other exceptions to subsection 15(2) may still apply. For example, a taxpayer who repays the outstanding portion within one year after the end of the tax year of the lender in which the effective date of January 1, 2023 occurs and meets all the requirements in subsection 15(2.6), will not have to include the amount of the outstanding portion in computing their income.

1.28 The exception in subsection 15(2.3) can apply where the debtor or borrower is a shareholder or a shareholder-employee.

Loans made in the ordinary course of the lender’s ordinary business of lending money

1.29 It is a question of fact whether a loan is made in the ordinary course of the lender’s ordinary business of lending money. While not an exhaustive list, the CRA considers the following elements to be indicative of a money-lending business:

• The income earned from lending money is an integral part of the lender's business.
• The lender's intention is to earn income from direct interest payments rather than through the enhancement of the value of an investment.
• The lender is able to establish a systematic and continuous pattern of lending money.
• The monies borrowed do not increase the capital of the borrower (for example, advances of working capital or payments in respect of guarantees).

1.30 A lender is generally not considered to be in the ordinary business of lending money where the lender issues loans for the purpose of an occasional investment of surplus funds, to make accommodations to friends or customers, or to make advances that are intended to remain a part of the capital of a borrower.

1.31 For subsection 15(2.3) to apply, the lender must not only be in the ordinary business of lending money, but the loan must be made in the ordinary course of that business. Not every loan made by a taxpayer that carries on a money-lending business is necessarily considered to have been made in the ordinary course of that business. For example, a lender may make a loan that is not prompted by the ordinary considerations that govern its money-lending business. Indications of this would be interest rates, repayment terms, credit checks or collateral requirements that differ from those normally applied in the ordinary course of the lender’s money-lending business.

Debts incurred in the ordinary course of a creditor’s business

1.32 It is a question of fact whether a debt arises in the ordinary course of a creditor’s business. Debts that are generally considered to arise in the ordinary course of a creditor’s business include trade debts and revolving debts (see ¶1.12).

1.33 A trade debt is considered to arise in the ordinary course of a creditor’s business where:

• the debt arises from the sale of goods or services by the creditor to a debtor; and
• the payment terms on the debt are the same as those provided on sales to other customers of the creditor.

Generally, trade debts are accounted for separately from shareholder loans in the books and records of the creditor.

1.34 An individual may have a revolving debt with a financial institution and may own, or be connected with someone who owns, shares in that institution. Subsection 15(2.3) applies in such a situation, if:

• the terms and conditions attached to the individual’s revolving debt are the same as those applicable to members of the public with no shareholding connections with the institution; and
• those terms and conditions are complied with.

Where a borrower or a lender is a partnership

1.35 Subsection 15(2.31) provides that, for the purposes of subsections 15(2.3) and (2.31):

1. a person or partnership that is a member of a particular partnership that is a member of another partnership is deemed to be a member of the other partnership; and
2. a borrower shall be considered to deal at arm’s length with a lender only if:
   • for greater certainty, the borrower and the lender deal with each other at arm’s length;
   • where either the borrower or the lender is a partnership and the other party is not, each member of the partnership deals at arm’s length with the other party; and
   • where both the borrower and the lender are partnerships, the borrower and each member of the borrower deal at arm’s length with the lender and each member of the lender.

1.36 Subsection 15(2.31) is applicable for loans made after 2022. Subsection 15(2.31) also applies in respect of the outstanding portion of a loan made before 2023 that remains outstanding on January 1, 2023, as described in ¶1.26 and 1.27.

Certain loans made to shareholder-employees

1.37 Subsection 15(2.4) provides that subsection 15(2) does not apply to certain loans made to a shareholder-employee. Such loans must be made in at least one of four specific situations (also see ¶1.38). These situations are identified in paragraphs 15(2.4)(a) to (d) and are explained in this Chapter under the following headings:

• Loan to a shareholder-employee who is not a specified employee
• Loan to acquire a dwelling
• Loan to acquire shares
• Loan to acquire a motor vehicle

1.38 In addition to the requirement that the loan be made in one of the four situations listed in ¶1.37, the conditions in paragraphs 15(2.4)(e) and (f) must also be met if the loan is to be excluded from income by subsection 15(2.4). These conditions are explained in this Chapter under the following headings:

• Determining if a loan was made because of shareholding or employment
• Bona fide terms for repayment within a reasonable time.

1.39 The last three exceptions listed in ¶1.37 only apply if the loan was made and used for the purpose described. In some cases, a borrower may have a total balance of loans owing to a corporation and only a portion was used for a described purpose. In such cases, the borrower must be able to prove that the portion used for the described purpose meets all of the conditions necessary for an exception under subsection 15(2.4).

1.40 If subsection 15(2.4) does not apply to a loan to a shareholder-employee or their spouse or common-law partner, one of the other exceptions to subsection 15(2) may still apply. For example, even if a loan to a shareholder-employee does not meet the conditions in subsection 15(2.4), the loan could still be excluded from the application of subsection 15(2) by subsection 15(2.3) if the conditions in subsection 15(2.3) are met (see ¶1.25).

Loan to a shareholder-employee who is not a specified employee

1.41 Subsection 15(2) does not apply where the conditions in paragraphs 15(2.4)(a), (e) and (f) are met. Paragraph 15(2.4)(a) applies where:

• the loan is made in respect of an individual who is an employee of the lender; and
• the employee is not a specified employee of the lender.

Paragraph 15(2.4)(e) is discussed at ¶1.57 to 1.60 and paragraph 15(2.4)(f) is discussed at ¶1.65 to 1.70.

1.42 Under subsection 248(1), an employee is a person who holds a position of employment and the term employment is defined to mean the position of an individual in the service of some other person (including Her Majesty or a foreign state or sovereign). Civil or common law will generally determine whether an individual is in the service of some other person. The definition of employee also provides that the term includes an officer which means that a director of a corporation is an employee of the corporation.

1.43 Subsection 248(1) defines a specified employee of a person to be an employee of the person who:

• is a specified shareholder of the person; or
• does not deal at arm's length with the person.

1.44 In general terms, a specified shareholder of a corporation is a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation. The definition of specified shareholder is in subsection 248(1) and includes a number of rules that apply in determining whether any particular taxpayer is a specified shareholder of a corporation.

1.45 Subsection 15(2.7) provides that for the purposes of section 15, an individual who is an employee of a partnership is deemed to be a specified employee of the partnership where:

• the individual is a specified shareholder of one or more corporations; and
• those one or more corporations, in total, are directly or indirectly entitled to not less than a 10% share of any income or loss of the partnership.

Loan to acquire a dwelling

1.46 Subsection 15(2) does not apply where the conditions in paragraphs 15(2.4)(b), (e) and (f) are met. Paragraph 15(2.4)(b) applies where:

• the loan is made in respect of an individual who is an employee of the lender or who is the spouse or common-law partner of an employee of the lender; and
• the loan is made to enable or assist the individual who received the loan in acquiring:
  • a dwelling for the individual to inhabit; or
  • a share of the capital stock of a cooperative housing corporation for the sole purpose of acquiring the right to inhabit a dwelling owned by the corporation, where the dwelling is for the individual to inhabit.

Paragraph 15(2.4)(e) is discussed at ¶1.57 to 1.60 and paragraph 15(2.4)(f) is discussed at ¶1.65 to 1.70.

1.47 The word dwelling includes a house, an apartment in a duplex or apartment building, a condominium, a cottage, a mobile home, a trailer, or a houseboat.

1.48 For purposes of paragraph 15(2.4)(b), the dwelling does not need to be located in Canada. The dwelling also does not need to be the principal residence (as defined in section 54) of the employee or the employee’s spouse or common-law partner. For more information on the meaning of principal residence see Income Tax Folio S1‑F3‑C2, Principal Residence.

1.49 The individual who received the loan must actually inhabit the dwelling unless exceptional circumstances intervene. Exceptional circumstances could include death, illness, fire, or transfer of the individual or their spouse or common-law partner to another employment location.

1.50 The exception in paragraph 15(2.4)(b) does not apply to a loan that exceeds the cost of the dwelling to the employee or the employee's spouse or common-law partner. For example, when an individual acquires a property that consists of two or more self-contained housing units, only one of which is inhabited by the individual, the exception in paragraph 15(2.4)(b) only applies if the loan is no greater than the proportionate cost of the one housing unit actually inhabited by the individual. Similarly, if the dwelling inhabited by the individual is located on a tract of land, the exception in paragraph 15(2.4)(b) only applies if the loan is no greater than an amount that is the aggregate of:

• the cost of the dwelling itself; and
• the proportionate cost of an area of the land that is reasonably required for the use and enjoyment of the dwelling.

1.51 Whether a loan has been made to enable or assist an employee or their spouse or common-law partner in acquiring a dwelling is determined by examining all of the relevant facts and circumstances. Generally, a loan made for the purpose of refinancing an existing indebtedness that was previously incurred by an employee to acquire a dwelling, will not meet this requirement.

1.52 There is an exception to the general position described in ¶1.51 that applies when a lender has made a commitment to an individual, on or before the acquisition of a dwelling, to provide permanent (as opposed to interim) financing for that acquisition. In determining whether such a commitment was made, all relevant facts and circumstances will be considered, including:

• formal documentation of the commitment;
• the nature of the original financing (which should have the characteristics of usual interim financing); and
• the reason(s) why the lender did not provide the original financing.

1.53 Loans made in respect of repairs, alterations, renovations, or additions to a dwelling are not considered to qualify for the exception in paragraph 15(2.4)(b).

Loan to acquire shares

1.54 Subsection 15(2) does not apply where the conditions in paragraphs 15(2.4)(c), (e) and (f) are met. Paragraph 15(2.4)(c) applies where:

• the loan is made in respect of an employee of the lender corporation or of a corporation related to the lender corporation;
• the loan is made to enable or assist the employee in acquiring shares of the lender corporation or a corporation related to the lender corporation;
• the shares are fully paid and previously unissued shares of the lender corporation or a corporation related to the lender corporation; and
• the shares are to be held by the employee for the employee’s own benefit.

Paragraph 15(2.4)(e) is discussed at ¶1.57 to 1.60 and paragraph 15(2.4)(f) is discussed at ¶1.65 to 1.70.

1.55 For purposes of the requirement described in the last bullet in ¶1.54, there is no specified length of time in which an employee must hold the shares in order for paragraph 15(2.4)(c) to exempt the loan from the application of subsection 15(2). However, disposing of the shares before the loan is repaid will generally be considered indicative of a purpose other than acquiring shares to be held by the employee for the employee's own benefit. This includes situations where there is a disposition to the corporation in which the employee holds shares.

Loan to acquire a motor vehicle

1.56 Subsection 15(2) does not apply where the conditions in paragraphs 15(2.4)(d), (e) and (f) are met. Paragraph 15(2.4)(d) applies where:

• the loan is made in respect of an employee of the lender;
• the loan is made to enable or assist an employee in acquiring a motor vehicle; and
• the motor vehicle is acquired to be used in the performance of the duties of the employee's office or employment.

Paragraph 15(2.4)(e) is discussed at ¶1.57 to 1.60 and paragraph 15(2.4)(f) is discussed at ¶1.65 to 1.70.

Determining if a loan was made because of shareholding or employment

1.57 For any of the exceptions in subsection 15(2.4) to apply, the condition in paragraph 15(2.4)(e) must be met. This condition requires that it be reasonable to conclude that the loan was made because of the individual’s employment and not because of any person’s shareholding. It is always a question of fact whether this condition has been met.

1.58 Some of the factors that may indicate that a loan made by a corporation to a shareholder-employee arose because of employment include:

• The loan was made on the same terms and conditions as loans made to other employees who are not shareholders.
• Where the shareholder is the only employee of the corporation, the individual can establish that employers of a similar size make loans of a similar amount under similar terms and conditions to employees with similar duties and responsibilities, but who are not shareholders.

1.59 Some of the factors that may indicate that a loan made by a corporation to a shareholder-employee arose because of shareholding include:

• The corporation only provides loans to shareholders;
• The terms and conditions attached to the loan provided by the corporation to the shareholder-employee were more favourable than those attached to loans provided to other employees who are not also shareholders.
• The loan was made to a shareholder who can significantly influence the business decisions of the corporation.
• The loan amount was significant relative to the retained earnings of the corporation.
• The loan was for a significant amount but the corporation did not require any security for the loan.

1.60 Where it is determined that subsection 15(2) does not apply to a loan to a shareholder-employee, and the loan was issued at a low-rate of interest or interest-free, section 80.4 may deem an interest benefit to arise. If a loan was made because of an individual’s office or employment, the employee may be deemed to have received an interest benefit under subsection 80.4(1). For information on the deemed interest benefit rules under subsection 80.4(1), see Canada.ca web page Loans and employee debt. If the loan was received because of any person’s shareholding, the borrower may be deemed to have received an interest benefit under subsection 80.4(2). For information on the deemed interest benefit rules under subsection 80.4(2), see Income Tax Folio S3‑F1‑C2.

Loans made in respect of certain trusts

1.61 The exception in subsection 15(2.5) provides that subsection 15(2) does not apply to a loan made in respect of a trust where:

1. the lender is a private corporation;
2. the private corporation is the settlor and sole beneficiary of a trust;
3. the sole purpose of the trust is to facilitate the purchase and sale of the shares in the circumstances described in ¶1.62; and
4. at the time the loan was made, bona fide arrangements were made for repayment of the loan within a reasonable time (see ¶1.65 to 1.70).

1.62 For purposes of the condition described in ¶1.61(c):

• the shares must be shares of the private corporation or a corporation related to the private corporation;
• the purchasers or sellers of the shares must be employees, other than specified employees, of the private corporation or of the corporation related to the private corporation; and
• the purchase or sale of the shares must be for an amount equal to the fair market value of the shares at the time of the purchase or sale.

Employee ownership trusts

1.63 Subsection 15(2.51) contains an exception to the application of subsection 15(2) to facilitate qualifying business transfers to employee ownership trusts that occur after December 31, 2023. This exception applies where the lender is a qualifying business and the borrower is an employee ownership trust that acquires control of the qualifying business. However, the exception is available only where the sole purpose of the loan is to facilitate a qualifying business transfer and bona fide arrangements are made to repay the loan within 15 years of the transfer. In general, an employee ownership trust is a trust that holds shares of a corporation for the benefit of the corporation's employees.

1.64 The terms employee ownership trust, qualifying business and qualifying business transfer are defined in subsection 248(1).

Bona fide terms for repayment within a reasonable time

1.65 For the purposes of the exceptions in subsections 15(2.3), (2.4), and (2.5):

• there must be bona fide arrangements for repayment of the loan within a reasonable time; and
• the arrangements for repayment of the loan must be made at the time the loan is made.

1.66 In considering whether arrangements for repayment of a loan are bona fide, the extent to which a borrower has respected the terms of an arrangement will be relevant. If a borrower is, or has previously been, in default on a payment(s), any unusual circumstances that might have hindered the borrower’s ability to carry out the arrangements will also be relevant.

1.67 Whether the arrangements provide for repayment of the loan within a reasonable time is a question of fact. In a given situation, one factor for consideration is the normal commercial practice that could be expected under similar circumstances.

1.68 At the time the loan is made, the arrangements for repayment must be such that it is possible to determine, with some certainty, the period within which the loan will be repaid. If it is not possible to determine the period within which a loan will be repaid, then it is not possible to determine whether the repayment period is reasonable. For example, assume the loan terms provide for repayment of the loan when the shares of a corporation reach a particular fair market value. Unless it is possible to determine with some accuracy when the share value will meet that fair market value amount, it is not possible to determine the period within which the loan will be repaid.

1.69 When trade debts are paid according to the creditor's normal payment terms, bona fide arrangements are considered to have been made at the time the debt arose for purposes of the exception in subsection 15(2.3).

1.70 When trade debts are not paid according to the creditor's normal payment terms, but they are settled within 12 months of being incurred, bona fide arrangements are considered to have been made at the time the debt arose for purposes of subsection 15(2.3).

Loans repaid within a certain period of time

1.71 Subsection 15(2.6) provides that subsection 15(2) does not apply where:

• the loan is repaid within one year after the end of the tax year of the lender or creditor in which the loan was made; and
• it is established by subsequent events or otherwise that the repayment is not part of a series of loans or other transactions and repayments (see ¶1.83 to 1.86).

1.72 Where the lender or creditor is a partnership, the tax year referred to in ¶1.71 is the fiscal period of that partnership.

Amendments to tax returns for prior tax years

1.73 Since it is not known whether the requirements of subsection 15(2.6) are met until one year after the end of the lender’s tax year in which the loan was made, sometimes a borrower’s tax return for a prior year will need to be amended. This will be the case where:

• the amount of the loan was not included in the borrower’s income under subsection 15(2) in the year the loan was made because it was anticipated that the exception in subsection 15(2.6) would apply; and
• after filing the borrower’s tax return for that year, it was determined that subsection 15(2.6) did not apply.

In such case, the borrower’s tax return for the year in which the loan was made must be amended to include the amount of the loan in income. Assuming no other changes are made to that prior year tax return, the amount so included in income will result in an increased tax liability for the borrower for that prior year and interest will be charged on the amount of the increased tax liability.

1.74 Sometimes, the opposite situation may occur where:

• the amount of the loan was included in the borrower’s income under subsection 15(2) in the year the loan was made; and
• after filing the borrower’s tax return for that year, it was determined that the exception in subsection 15(2.6) applied.

In this situation, the borrower’s tax return for that prior year must be amended to remove the loan amount previously included in income pursuant to subsection 15(2) for that year. Assuming no other changes are made to that prior year tax return, the amendment will generally result in a refund of taxes overpaid by the borrower in that preceding year. The borrower will also be entitled to receive interest on the overpaid taxes.

1.75 If the loan described in ¶1.73 or 1.74 was a low-interest or interest-free loan, further amendments may be required to the borrower’s tax return for a prior year in relation to the deemed interest benefit rules under subsection 80.4(2). For information on subsection 80.4(2), see Income Tax Folio S3‑F1‑C2.

Deduction where a loan previously included in income is repaid

1.76 Generally, where a taxpayer repays all or part of a loan that was included in income in a prior year under subsection 15(2), the taxpayer can deduct the repayment under paragraph 20(1)(j). The amount of the repayment is deductible in the year the loan is repaid.

1.77 However, no deduction is allowed under paragraph 20(1)(j) if the repayment is made as part of a series of loans or other transactions and repayments (see ¶1.83 to 1.86).

1.78 A deceased shareholder’s estate (or civil law succession) may be able to claim a paragraph 20(1)(j) deduction where the legal representative of the estate or succession makes a repayment of a loan that was owed by the shareholder at the time of death. The deduction can be claimed in the year the loan is repaid provided the deceased shareholder had included the amount of the loan in income under subsection 15(2) in a prior tax year. No deduction can be claimed however, where the shareholder loan is repaid by a beneficiary and not the legal representative of the estate or succession.

1.79 When calculating the income of a partnership, a deduction can be claimed under paragraph 20(1)(j) where the partnership repays a loan that was, by virtue of subsection 15(2), included in calculating the partnership income in a prior tax year. As with other claims for a deduction under paragraph 20(1)(j), the repayment must not be part of a series of loans or other transactions and repayments.

Repayments

1.80 A loan does not necessarily need to be repaid in money. A borrower can make repayments to a lender, in whole or in part, by way of a transfer of property, whether real or personal, immovable or movable. A transfer of property constitutes repayment only to the extent of the fair market value of the transferred property at the time of the transfer.

1.81 Repayments are considered to apply first to the oldest loan outstanding (first-in, first-out basis) unless the facts clearly indicate otherwise.

1.82 A loan can be considered to have been repaid by way of set-off (or compensation under civil law) against a receivable of the borrower if the set-off or compensation represents a legal discharge of the loan as evidenced by the circumstances, including contracts or agreements between the parties and the accounting records. Repayments can also be made by applying dividend, salary or bonus payments against an outstanding loan.

Whether a repayment is made as part of a series of loans or other transactions and repayments

1.83 When a repayment of a loan is part of a series of loans or other transactions and repayments:

• the subsection 15(2.6) exception to the subsection 15(2) income inclusion does not apply; and
• the deduction under paragraph 20(1)(j) that would otherwise arise upon repayment of the loan is not available (see ¶1.76 to 1.79).

Generally, determining whether a repayment was made as part of a series of loans or other transactions and repayments requires a review of all the relevant facts and circumstances.

1.84 The purpose of the series of loans or other transactions and repayments rule in subsection 15(2.6) is to prevent a taxpayer from perpetually deferring tax by using new loans to repay existing loans. Subject to the comments in ¶1.86, this means that a repayment would generally be viewed as part of a series of loans or other transactions and repayments where all or a portion of a loan is repaid before the end of the tax year of a lender and an amount is re-borrowed. It is a question of fact whether a repayment has been sourced from re-borrowings in any particular case.

1.85 A repayment may also be considered to have been made as part of a series of loans or other transactions and repayments where the proceeds of a new loan are used to repay an existing shareholder loan. However, such a repayment will not be considered part of a series of loans or other transactions and repayments if it can be shown that the new loan:

• was from an independent source;
• was received for a genuine business purpose; and
• was not received for the purpose of repaying the existing shareholder loan amount.

1.86 Shareholder loan repayments that result from applying dividends, salaries or bonuses owed to the borrower are not considered part of a series of loans or other transactions and repayments for the purposes of subsection 15(2.6) and paragraph 20(1)(j). This is the case even where the repayment is followed by additional borrowings.

Applying subsections 15(2) and 15(2.6) and paragraph 20(1)(j) to running loan accounts

1.87 As discussed at ¶1.11, a lending corporation may have loan accounts, drawings accounts, or other similarly named accounts within which various transactions are posted in the year. These transactions may include repayments as well as charges or drawings for, but not limited to, one or more of the following:

• loans;
• payments made to third parties by the corporation on behalf of a shareholder; or
• advances against future salaries, rents or anticipated dividends.

Where subsection 15(2) applies to a person or partnership in respect of a number of transactions described above, all of the relevant facts will be considered to determine whether a series of loans or other transactions and repayments exist.

Additional rules for loans made to non-residents

1.88 Where a borrower is resident in Canada, the amount of the loan is included in the borrower’s Part I income pursuant to subsection 15(2). Where the borrower is a non-resident of Canada, paragraph 214(3)(a) deems such an amount to be a dividend paid to the non-resident borrower from a Canadian resident corporation for purposes of Part XIII. The amount of the deemed dividend is the amount that would have been included in income under subsection 15(2), if Part I were applicable to the non-resident borrower.

1.89 A deemed dividend under paragraph 214(3)(a) is subject to Part XIII tax under subsection 212(2). The tax rate that applies to dividends under subsection 212(2) is 25% but may be reduced by a tax treaty between Canada and another country. The provisions of the particular treaty must be considered to determine if a reduced tax rate applies. For more information concerning Canada's tax treaties with other countries, go to Tax Treaties.

1.90 Subsection 215(1) requires the lender to withhold and remit the income tax payable under subsection 212(2) to the Receiver General. If there is no series of loans or other transactions and repayments, the non-resident who has received a loan in a particular tax year cannot be deemed to have received a dividend until one year after the end of the lender’s tax year. This allows for a determination of whether the exception under subsection 15(2.6) applies to the loan. In these circumstances, it is the CRA's practice not to levy a penalty and not to charge interest in respect of the remittance of the tax, provided that the lender remits the tax on or before the 15th day of the 13th month following the end of the lender’s tax year in which it made the loan. If the tax is not remitted by this day, interest will start accruing as of the 16th day of the 13th month.

1.91 If there is a series of loans or other transactions and repayments, the tax under subsection 212(2) is based on the net increase in the loan during the tax year of the lender. In the case of a series, a penalty will not be levied and interest will not be charged provided that the tax is remitted on or before the 15th day of the month following the end of the lender's tax year in which the net increase occurred. If the tax is not remitted by this day, interest will start accruing as of the 16th day of the month following the end of the lender's tax year.

1.92 If a PLOI election is available in respect of a loan but has not yet been filed, the CRA will assess Part XIII withholding tax after the time period described in subsection 15(2.6) has elapsed. However, the CRA will reassess the tax liability if a late-filed PLOI election is subsequently made. The effect of a late-filed PLOI election is that the amount owing is considered to be a PLOI from the day the loan was advanced, with the interest imputation rules under subsection 17.1(1) applying from that day. Accordingly, arrears interest calculated under subsection 161(1) will accrue on any additional tax owing from the balance-due day of each affected tax year. Instalment interest could also be impacted by the election. For more information concerning PLOI elections including the filing of a late-filed election, see the Understanding interest page on the Canada.ca website.

1.93 Subsection 227(6.1) provides for a refund of the Part XIII tax paid on an amount in respect of a loan deemed to be a dividend by paragraph 214(3)(a) if:

• the person, on whose behalf the tax was paid, repays the loan or a portion of it; and
• the repayment is not part of a series of loans or other transactions and repayments.

1.94 The refund under subsection 227(6.1) is limited to the lesser of:

• the Part XIII tax originally paid on the portion of the loan being repaid; and
• the Part XIII tax that would be payable if, at the time of the repayment, a dividend described in paragraph 212(2)(a), equal to the amount of the repayment, were paid to the person on whose behalf the tax was paid.

1.95 To obtain a refund under subsection 227(6.1), an application must be made within 2 years of the end of the calendar year in which the repayment was made. When the person on whose behalf the tax was paid is, or is about to become, liable to make any payment to Her Majesty in right of Canada, the amount of the refund may be applied by the Minister to that payment.

1.96 The comments in ¶1.81 apply for the purposes of determining whether a Part XIII tax refund is available. Unless the facts clearly indicate otherwise, repayments are considered to apply first to the oldest loan outstanding.

1.97 In a situation where a loan amount that is owed by a non-resident borrower has been assigned by the original lender to a new lender and the borrower subsequently repays the loan to the new lender, the borrower may still be entitled to a refund of the Part XIII tax previously assessed.

1.98 Paragraph 214(3)(a) only applies for purposes of Part XIII. This means that, if the lender is a private corporation, the deemed dividend does not qualify as a dividend paid by the corporation for purposes of the dividend refund under subparagraph 129(1)(a)(i).

Forgiven amounts

1.99 When a loan or other obligation of a shareholder to a corporation is settled or extinguished by payment of less than the amount of the obligation outstanding, or by no payment, an amount may be required to be included in income under subsections 15(1), (1.2) and (1.21). Subsection 15(1.2) determines the value of the benefit that is to be included in the shareholder’s income under subsection 15(1). Subsection 15(1.2) deems the value of the benefit to be the forgiven amount at the time the loan was settled or extinguished. The forgiven amount is defined in subsection 15(1.21). See Interpretation Bulletin IT-432R2 for a discussion of subsection 15(1.2).

Application

This Chapter, which may be referenced as S3-F1-C1, is effective April 10, 2025 and replaces and cancels Interpretation Bulletin IT‑119R4, Debts of Shareholders and Certain Persons Connected with Shareholders.

Any technical updates from the cancelled interpretation bulletin can be viewed in the Chapter History page.

Except as otherwise noted, all statutory references herein are references to the provisions of the Income Tax Act, R.S.C.,1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c. 945, as amended.

Links to jurisprudence are provided through CanLII.

Income tax folios are available in electronic format only

Reference

Subsection 15(2) (also subsections 15(1), 15(1.2), 15(2.1) to (2.7), 15(7) and 80.4(2), the definition of foreign affiliate in subsection 95(1), 212(2), 214(3) and 227(6.1), and the definitions of specified employee and specified shareholder in subsection 248(1).

See also Income Tax Folio S1‑F3‑C2, Income Tax Folio S1‑F5‑C1, Income Tax Folio S3‑F1‑C2, and Interpretation Bulletin IT‑432R2.