Introduction

The purpose of a Chapter History page is to highlight any amendments to the information contained in an income tax folio, including amendments to the information originally contained in an interpretation bulletin that has been cancelled and replaced with a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Except as otherwise noted, all statutory references herein are references to 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.

Update April 10, 2025

General

Income Tax Folio S3-F1-C1, Shareholder Loans and Debts, replaces and cancels Interpretation Bulletin IT–119R4, Debts of Shareholders and Certain Persons Connected with Shareholders.

In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below.

Legislative and other changes

Throughout the Chapter, all references to spouse have been changed to spouse and common-law partner based on the 2000 same-sex partner bill.

¶1.7 has been added to clarify the meaning of the term person as it is used in this Chapter.

¶1.9 has been added to reflect the legislative amendment made to subsection 15(2.1) by S.C. 2013, c. 34, s. 177(5). The amendment clarified that a partnership can be “connected with a shareholder” of a particular corporation for purposes of subsection 15(2.1) if that partnership does not deal at arm’s length with, or is affiliated with, the shareholder. The amendment is effective in respect of loans made and debts arising after October 31, 2011.

¶1.10 has been added to advise readers on where they can find information on determining whether persons are dealing at arm’s length.

¶1.12 and 1.13 (formerly included in ¶7 of IT-119R4) have been expanded to provide readers with information on when loans or debts may be considered to exist for purposes of subsection 15(2). The revisions also make readers aware of the potential application of subsection 15(1) in the event that an amount other than salary, dividends, a loan or a debt is received by a shareholder from a corporation.

¶1.14 has been added to clarify that tax consequences are not determined by accounting entries or what a taxpayer might have done or intended to do, but are determined by the reality underlying the accounting entries and the transactions that the taxpayer actually undertook.

¶1.16 (formerly included in ¶4 of IT-119R4) has been revised to clarify when a loan is considered to have been made for purposes of the rules discussed in the chapter.

¶1.18 has been added to reflect the legislative amendments made by S.C. 2016, c. 12, s. 5 and s. 24. These amendments introduced rules for applying subsections 15(2) and 80.4(2) in the context of back-to-back shareholder loan arrangements. The rules are intended to address the possible avoidance of the application of subsections 15(2) and 80.4(2) through the use of indirect funding arrangements. For single intermediary arrangements, the amendments are effective for loans received and debts incurred after March 21, 2016. Transitional rules apply for loans received and debts incurred before March 22, 2016 and that were still outstanding on that date. For multiple-intermediary arrangements, the amendments are effective for loans received and debts incurred after December 31, 2016 and transitional rules apply for loans received and debts incurred before January 1, 2017 and that were still outstanding on that date.

¶1.22 and 1.23 have been added to reflect legislative amendments made by S.C. 2012, c. 31, s. 5(2) and s. 5(3), which amended subsection 15(2) and added subsections 15(2.11) to 15(2.15) to the Act. The amendments allow certain loans to be excluded from the potential application of subsection 15(2) and paragraph 214(3)(a). Instead, such loans are subject to the interest imputation rules found in section 17.1. These amendments are effective for loans received and debts incurred after March 28, 2012.

¶1.24 (formerly included in ¶37 of IT-119R4) has been revised to clarify that the lender and borrower must both be non-residents at the time the loan was received or the debt was incurred for the exception in subsection 15(2.2) to apply.

¶1.25 to 1.28 (formerly ¶8 of IT-119R4) have been revised to reflect the legislative amendment made by S.C. 2023, c. 26, s. 6(1). Subsection 15(2.3) is intended to apply to businesses that primarily engage in arm's length lending. Following this amendment, the money lending business exception will not generally apply to internal money lenders within a corporate group. This amendment applies to loans made after 2022. This amendment also applies to the outstanding portion of any loan made before 2023 if, at the time it was made, the loan met the conditions in subsection 15(2.3) (as it then read). This discussion has also been revised to clarify that, although the condition regarding repayment terms is the same for both loans and debts, the condition regarding loans made in the ordinary course of the lender's ordinary business of lending money applies to loans, and the condition regarding debts arising in the ordinary course of the creditor's business applies to debts other than loans.

¶1.29 to 1.31 have been added to provide readers with general information on the exception in subsection 15(2.3) for loans made in the ordinary course of the lender’s ordinary business of lending money.

¶1.32 has been added to provide clarity on some of the types of loans and debts that may be considered to arise in the ordinary course of a creditor’s business.

¶1.35 and 1.36 have been added to reflect legislative amendments made by S.C. 2023, c. 26, s. 6(1). Subsection 15(2.31) is added to provide, for the purpose of subsection 15(2.3), rules to deal with cases where a borrower or a lender is a partnership.

¶1.39 (formerly ¶14 of IT-119R4) has been revised to remove the statement that any loan which qualifies for one of the exceptions in paragraphs 15(2.4)(b) to (d) needs to be maintained in a separate account. The statement was removed as there is no such requirement in the legislation or jurisprudence.

¶1.46 (formerly included in ¶9 and 17 of IT-119R4) has been revised to remove the reference to subsection 252(4) and to add the reference to common-law partner to reflect the amendment made by the 2000 same-sex partners bill, S.C. 2000, c.12, effective for 2001 and later tax years.

¶1.58 to 1.60 (formerly ¶11 of IT-119R4) have been expanded to include more information on factors to be considered in determining whether a loan was received because of an individual’s employment or because of any person’s shareholdings. The discussion has also been expanded to make readers aware of the potential application of section 80.4 in situations where it is determined that subsection 15(2) does not apply to a particular loan from a corporation, including the addition of cross references to other income tax folios where readers can find more information.

¶1.62 (formerly included in ¶10 of IT-119R4) has been revised to remove a reference to loans made after June 19, 1996. All loans currently outstanding and in respect of which a determination under subsection 15(2) may be made would have been issued after June 19, 1996. The reference to that date was therefore no longer relevant.

¶1.63 and 1.64 have been added to reflect a legislative amendment made by S.C. 2024, c. 15, s. 5(1) (formerly Bill C-59) which added subsection 15(2.51) to the Act, effective January 1, 2024.

¶1.67 (formerly included in ¶12 of IT-119R4) has been revised to remove the example previously provided as it was believed to be confusing to readers.

¶1.68 has been added to clarify that it must be possible at the time the loan is made to determine with some certainty when it is to be repaid. Only then is it possible to determine whether the repayment is required within a reasonable time.

¶1.73 and 1.74 have been added to clarify that amendments to tax returns may be needed 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.

¶1.75 has been added to clarify how subsection 80.4(2) applies in respect of a loan to which subsection 15(2.6) may apply.

¶1.77 has been revised to remove the wording previously provided in (a) of ¶30 of IT-119R4 as it was believed to be confusing to readers.

¶1.78 (formerly ¶32 of IT-119R4) has been revised to clarify that no deduction can be claimed under paragraph 20(1)(j) when a deceased shareholder’s loan is repaid by a beneficiary of the estate and not the legal representative of the estate.

The information formerly included in ¶25 of IT-119R4 has been removed because it provided an incomplete explanation of the issues concerned.

¶1.80 (formerly ¶26 of IT-119R4) has been revised to remove the phrase “bona fide”. The phrase was deleted because a transfer has either taken place or it has not. It is the circumstances around the transfer of property that would have to be shown to be bona fide in order for a repayment to be considered to have been made.

¶1.82 has been added to clarify that a set-off of a loan will generally only be considered to exist where there is evidence that the set-off represents a legal discharge of the loan. The paragraph also clarifies that a repayment against a loan can be considered to have been made where salary, bonuses and dividends are applied against the outstanding loan balance.

¶1.83 to 1.86 (formerly included in ¶28 and 29 of IT-119R4) have been revised and expanded to clarify the CRA’s views on when there is a series of loans or other transactions and repayments for purposes of subsection 15(2.6) in light of the Tax Court of Canada decisions in Nigel T. Hill and Uphill Holdings v. The Minister of National Revenue (93 DTC 148), Joel Attis v. The Minister of National Revenue (92 DTC 1128) and Diane Meeuse v. The Queen (94 DTC 1397).

¶1.89 has been added to clarify that the tax rate on a deemed dividend under paragraph 214(3)(a) may be reduced by a tax treaty between Canada and another country.

¶1.92 has been added to provide the CRA’s view on the application of Part XIII withholding tax where a PLOI election has not been filed or if the election is filed late. It has also been added to provide the CRA’s view on the effect of the late-filed PLOI election in calculating the amount of arrears interest and instalment interest.

¶1.93 (formerly included in ¶39 of IT-119R4) has been revised to remove the reference to loans repaid after December 21, 1992. As all loan repayments made will be after December 21, 1992 a reference to the date is no longer relevant.

¶1.97 has been added to provide the CRA’s view that a refund of Part XIII tax previously assessed may be available where a loan made to a non-resident borrower is assigned by the original lender to a new lender and the borrower subsequently repays the loan to the new lender.