Series 3: Property, Investments and Savings Plans

Folio 1: Shares, Shareholders & Security Transactions

Chapter 2: Deemed Interest Benefit on Shareholder Loans and Debts

Summary

Persons and partnerships are generally taxable on benefits received from a corporation of which they are a shareholder or connected with a shareholder. The purpose of the deemed interest benefit rules in subsection 80.4(2) is to include in a person or partnership’s income an amount representing the benefit received in respect of low‑interest or interest‑free loans or debts incurred by virtue of shareholdings.

This Chapter describes:

• the general circumstances in which the deemed interest benefit rules apply;
• the exceptions to the rules;
• how the deemed interest benefit is calculated and included in a taxpayer’s income; and
• the circumstances in which a deemed interest benefit may be deductible as an interest expense.

Where a loan or debt is considered to have been received or incurred by virtue of shareholdings, readers should refer to Income Tax Folio S3‑F1‑C1, Shareholder Loans and Debts which discusses the income inclusion that can result under subsection 15(2) of Part I of the Act. The deemed interest benefit rules do not apply in respect of any loan or debt or part thereof that has already been included in computing the income of a person or partnership under Part I. A person or partnership may receive a loan or incur a debt in circumstances where both a shareholding and employment relationship exists between the debtor and creditor. In this case, it is necessary to determine whether the loan or debt was received or incurred by virtue of their shareholding or employment. This Chapter discusses some of the factors to be considered in making such a determination.

This Chapter covers the situation where the loan or debt is considered to have been received or incurred because of or as a consequence of a person’s or partnership’s shareholdings.

Where the loan or debt is considered to have been received or incurred because of or as a consequence of an individual’s office or employment, readers should see Canada.ca web page Loans and employee debt for more information.

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 80.4(2) – general comments

2.1 In some cases, subsection 80.4(2) deems a person or partnership receiving a loan or incurring a debt at a low rate of interest or interest‑free to have received an interest benefit. The deemed interest benefit generally reflects the extent to which the interest rate is less than a prescribed rate of interest. The calculation of the amount of the deemed interest benefit is discussed at ¶2.25. A deemed interest benefit under subsection 80.4(2) is included in the debtor’s income by virtue of subsections 15(1) and 15(9) of Part I of the Act.

2.2 Subsection 80.4(2) generally 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 corporation;
   2. connected with a shareholder of a corporation;
   3. a member of a partnership that was a shareholder of a corporation; or
   4. a beneficiary of a trust that was a shareholder of a corporation; and
3. because of the shareholdings described in (b), that person or partnership received a loan from, or otherwise incurred a debt to:
   
   1. the corporation;
   2. a corporation related to that corporation; or
   3. a partnership of which the corporation or the related corporation was a member.

In this Chapter, a person or partnership described in (b) is generally referred to as the debtor or borrower and a corporation or partnership described in (c) is generally referred to as the creditor or lender.

2.3 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.

2.4 Sometimes, subsection 80.4(2) does not apply to a loan received in a situation described in ¶2.2. These exceptions are discussed later in this Chapter under the following headings:

Where the borrower is a Canadian corporation or a partnership with Canadian corporation members only

Where the interest rate is an arm's length rate

Where the loan is included in income

Where the loan relates to a qualifying business transfer

Meaning of “person”

2.5 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 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”

2.6 Subsection 80.4(8) 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 the shareholder of a particular corporation for purposes of subsection 80.4(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 80.4(8).

2.7 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 with or is affiliated with the shareholder.

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

Loans and debts

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. Subsection 80.4(2) can therefore apply to revolving credit.

2.10 A written agreement is the preferable means of establishing that a loan or debt exists, although it is not necessary. In the absence of a written agreement there must be convincing evidence that a loan or debt exists. Such evidence could include a corporate resolution setting out the loan or debt and the terms of its repayment. Moreover, such a corporate resolution should be reflected in the financial statements of the 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, subsections 15(2) and 80.4(2) will not apply. However, subsection 15(1) may apply. Subsection 15(1) generally requires a shareholder to include the value of any benefit that was conferred on the shareholder by a corporation in income. An example of such a situation would be where a corporation pays personal expenses of a shareholder and there is no agreement that the shareholder will reimburse the corporation for those expenses.

2.11 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.

2.12 The rules discussed in this Chapter generally apply in the same manner to loans and debts but, for simplicity, the discussion will refer to loans only.

Exceptions to the application of subsection 80.4(2)

Where the borrower is a Canadian corporation or a partnership with Canadian corporation members only

2.13 Subsection 80.4(2) does not apply to deem an interest benefit where the borrower is a corporation resident in Canada. It also does not apply where the borrower is a partnership and all of the members of the partnership are corporations resident in Canada.

Where the interest rate is an arm’s length rate

2.14 Paragraph 80.4(3)(a) provides that subsection 80.4(2) does not apply if the interest rate on the loan is equal to or greater than the rate that, having regard to all the circumstances (including the terms and conditions of the loan), would have been agreed upon at the time the loan was received between hypothetical parties dealing with each other at arm's length if:

• none of the parties received the loan by virtue of the shareholding of a person or partnership or an individual’s office or employment; and
• the ordinary business of the lender included the lending of money.

This exception does not apply if any party, other than the borrower, made or was required to make any interest payments on the loan.

Where the loan is included in income

2.15 Paragraph 80.4(3)(b) provides that subsection 80.4(2) does not apply where the loan has been included in the income of a person or partnership under Part I. For example, subsection 80.4(2) does not apply where the amount of the loan is included in the income of the borrower by subsection 15(2). A person or partnership that has received a loan because of shareholding should determine whether subsection 15(2) applies before considering subsection 80.4(2). A borrower may not avoid the application of subsection 15(2) by voluntarily including a subsection 80.4(2) benefit in income. For information on subsection 15(2), see Income Tax Folio S3‑F1‑C1, Shareholder Loans and Debts.

2.16 Sometimes, a shareholder loan is settled or extinguished by payment of less than the amount of the loan outstanding, or by no payment. In such cases, the portion of the loan that is settled or extinguished in excess of any payment made at that time may be required to be included in the borrower’s income under subsections 15(1) and (1.2). Information on subsection 15(1.2) is found in Interpretation Bulletin IT‑432R2, Benefits Conferred on Shareholders. Paragraph 80.4(3)(b) prevents subsection 80.4(2) from applying to the portion of the loan that was forgiven and included in the borrower’s income. A subsection 80.4(2) deemed interest benefit must still be calculated for any portion of the loan that remains outstanding. Also, when a loan is forgiven and included in income, paragraph 80.4(3)(b) does not alter the requirement to include a deemed interest benefit in income for the years prior to the year in which the forgiveness occurs.

Where the loan relates to a qualifying business transfer

2.17 Paragraph 80.4(3)(c) provides that subsection 80.4(2) does not apply in respect of any loan or debt or part thereof that:

• satisfies the conditions set out in subsection 15(2.51); and
• is repaid within 15 years after the qualifying business transfer referred to in subsection 15(2.51).

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.

2.19 The terms employee ownership trust, qualifying business and qualifying business transfer are defined in subsection 248(1). For more information regarding subsection 15(2.51), see Income Tax Folio S3‑F1‑C1 and Canada.ca web page Employee Ownership Trusts (EOT).

Loans to shareholder‑employees

2.20 Subsection 80.4(2) generally applies where a loan is received by virtue of shareholding and none of the exceptions discussed at ¶2.13 to 2.16 apply. Subsection 80.4(1) is similar to subsection 80.4(2), but it generally applies where a loan is received because of or as a consequence of an individual’s office or employment.

2.21 Sometimes it is necessary to determine which of subsections 80.4(1) or 80.4(2) applies in respect of a particular loan. This is often the case when a shareholder‑employee receives a loan from their corporation. It is a question of fact whether any particular loan is received because of shareholding or because of an office or employment.

2.22 Some of the factors that may indicate that a loan received by a shareholder-employee from a corporation was received because of their shareholding include:

• Loans are only made available to shareholders.
• The loan is made under more favourable terms and conditions to the shareholder‑employee than is the case for loans provided to other employees.
• The loan is provided to a shareholder who can significantly influence the business decisions of the corporation.
• The loan amount is very significant relative to the retained earnings of the corporation.
• The loan is for a significant amount but for which the corporation does not require any security.

2.23 Some of the factors that may indicate that a loan received by a shareholder‑employee from a corporation was received because of their office or employment include:

• The loan is provided on the same terms and conditions as loans provided 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 provide loans of a similar amount under similar terms and conditions to employees with similar duties and responsibilities, but who are not shareholders.

2.24 For information on deemed interest benefits under subsection 80.4(1), see Canada.ca web page Loans and employee debt.

Calculation of the subsection 80.4(2) deemed interest benefit

2.25 The deemed interest benefit in respect of a taxpayer’s loans to which subsection 80.4(2) applies for a tax year, is the amount (if any) calculated by the formula:

A – B

Where:

A is the interest on the outstanding portion of each loan computed at the prescribed rate of interest for the period in the year during which it was outstanding (the provisions of subsection 80.4(2) can apply in respect of a loan as long as any part of it remains unpaid); and

B is the total of:

1. the interest that is paid in the year or within 30 days thereafter on the outstanding portion of each such loan for the period in the year during which it was outstanding, except for loans deemed to have been made under subsection 15(2.17) (see ¶2.26); and
2. the specified interest amounts for the year in respect of all such loans that are deemed to have been made under subsection 15(2.17).

2.26 In general terms, subsection 15(2.17) deems certain loans made by a particular corporation or partnership under back‑to‑back shareholder loan arrangements described in subsection 15(2.16) to have been loans made directly to the borrower by the particular corporation or partnership for the purposes of sections 15 and 80.4. The rules in subsections 15(2.16) to (2.192) 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. The amount of the loan that the borrower will be deemed to have received from the particular corporation or partnership under subsection 15(2.17) is equal to the amount of the funding indirectly provided by the particular corporation or partnership. The phrase specified interest amount is defined in subsection 80.4(7) and is relevant for loans deemed to have been made under subsection 15(2.17).

2.27 The prescribed rate of interest for the purposes of subsection 80.4(2) is defined by subsection 80.4(7) and is determined in accordance with sections 4300 and 4301 of the Regulations. The rate is determined quarterly by reference to the rate of interest on 90‑day Government of Canada Treasury Bills. The prescribed rate of interest for any particular quarter, dating back to 2006, is available on the Prescribed interest rates page on the Canada.ca website.

Loans from related corporations or partnerships

2.28 Sometimes, a shareholder of a particular corporation may receive a loan from a corporation related to the particular corporation. Where the shareholder pays interest on that loan to the related corporation at an amount at least equal to the prescribed rate of interest, no deemed interest benefit arises under subsection 80.4(2). If the shareholder pays interest on the loan at a rate that is less than the prescribed rate of interest, a deemed interest benefit will arise unless one of the exceptions explained in ¶2.13 to 2.16 applies.

2.29 The particular corporation referred to in ¶2.28 may pay the interest on the loan to the related corporation on the shareholder’s behalf. If the interest paid by the particular corporation to the related corporation is at a rate at least equal to the prescribed rate of interest, no deemed interest benefit arises under subsection 80.4(2). However, regardless of whether the interest paid by the particular corporation on the shareholder’s behalf is less than, equal to, or more than the prescribed rate of interest, the shareholder is considered to have received a taxable benefit under subsection 15(1). The amount of the taxable benefit under subsection 15(1) is the amount of the interest paid by the particular corporation to the related corporation.

2.30 The comments in ¶2.28 and 2.29 similarly apply where the shareholder receives a loan from a partnership and the particular corporation or a corporation related to the particular corporation was a member of the partnership.

Tax years in which subsection 80.4(2) applies

2.31 Where a borrower is an individual or corporation, subsection 80.4(2) first applies in the tax year of the borrower in which the loan is received. Where the borrower is a partnership, subsection 80.4(2) first applies in the fiscal period of the partnership in which the loan was received. A person or partnership is considered to have received a loan when the funds are advanced or the relevant documents are signed and the person or partnership becomes legally obligated to repay the loan.

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. For information on situations where a loan is considered to have been repaid, see ¶1.80 to 1.82 of Income Tax Folio S3‑F1‑C1.

2.33 There is no requirement that a loan be outstanding at the end of a borrower’s tax year before a deemed interest benefit under subsection 80.4(2) can arise in respect of that year. A loan that is outstanding during only part of a borrower’s tax year can give rise to a subsection 80.4(2) deemed interest benefit for that portion of the year.

Amendments to tax returns for prior years

2.34 Sometimes, a borrower’s tax return for a prior year may need to be amended 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 (see ¶2.36); and
• it is determined after the filing of the borrower’s tax return for that year that the subsection 15(2.6) exception does not apply.

In such a case, the borrower’s tax return for the year in which the loan was received should be amended to include the amount of the loan in income. If a deemed interest benefit under subsection 80.4(2) had originally been included in the borrower’s tax return for the year in which the loan was received, the amendment to the return should also remove this deemed interest benefit amount from income. Assuming no other changes are made to the prior year’s tax return, the amendments 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.

2.35 Sometimes, the opposite situation may occur where:

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

In this case, and assuming subsection 80.4(2) would have otherwise applied, the borrower would have relied on paragraph 80.4(3)(b) (see ¶2.15) and not included a subsection 80.4(2) deemed interest benefit in income for the year in which the loan was received. The borrower should amend the tax return for that year to remove the subsection 15(2) loan amount previously included in income and to add the amount of any subsection 80.4(2) deemed interest benefit to income for that year. Assuming no other changes are made to the prior year’s tax return, the amendments will result in a reduced tax liability for the borrower for that preceding year. The reduced tax liability 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.

2.36 Subsection 15(2.6) is an exception to subsection 15(2) and is discussed in detail in Income Tax Folio S3‑F1‑C1. Generally, subsection 15(2.6) provides that subsection 15(2) does not apply to a loan repaid within one year after the end of the lender’s tax year in which the loan was made unless the repayment is part of a series of loans or other transactions and repayments. This one year delay in being able to determine whether the requirements of subsection 15(2.6) are met is the reason why the borrower may need to amend the tax return filed for the year in which the loan was made.

Netting of loans

2.37 In some cases, where a shareholder has received a loan from a corporation, the corporation may also have received a loan from the shareholder. Generally, a deemed interest benefit under subsection 80.4(2) cannot be avoided by simply netting an amount due to a shareholder with an amount due from that shareholder. A loan is only considered to no longer exist for purposes of subsection 80.4(2) after its actual cancellation or extinguishment. See ¶1.80 to 1.82 of Income Tax Folio S3‑F1‑C1 for more information on when a loan is considered to have been repaid.

Interest rebates

2.38 A shareholder who has received a loan from a corporation may become entitled to an interest rebate under an agreement between the shareholder and the corporation. In these circumstances, any interest rebate received in a tax year is brought into the shareholder’s income for the year under subsection 15(1). Information on subsection 15(1) can be found in Interpretation Bulletin IT‑432R2.

Subsection 80.4(2) benefit amount as interest expense

2.39 Section 80.5 provides a deeming rule with respect to the deduction of interest expense under paragraph 20(1)(c). Any interest benefit deemed by subsection 80.4(2) to have been received by a person or partnership in a tax year is deemed to be interest paid in, and payable in respect of, the year by the borrower pursuant to a legal obligation to pay interest on borrowed money. This means that the borrower may be able to deduct the amount of the deemed interest benefit where the loan is used for a purpose described in paragraph 20(1)(c). For information on the deductibility of interest expense under paragraph 20(1)(c), see Income Tax Folio S3‑F6‑C1, Interest Deductibility.

Information returns

2.40 Every person or partnership that confers a subsection 80.4(2) benefit on a taxpayer is required by paragraph 200(2)(i) of the Regulations to file a T4A, Statement of Pension, Retirement, Annuity, and Other Income information return. The amount to be reported on this form where a loan is received because of shareholding is described in Chapter 3 of Guide T4130, Employer's Guide ‑ Taxable Benefits and Allowances.

Additional rules for loans to non‑residents

2.41 Where a borrower is resident in Canada, a deemed interest benefit under subsection 80.4(2) is included in the borrower’s Part I income pursuant to section 15 (see ¶2.1). However, where the borrower is non‑resident and subsection 80.4(2) applies, paragraph 214(3)(a) deems a dividend to have been paid to the non-resident by a corporation resident in Canada for purposes of Part XIII. The amount of this deemed dividend is equal to the amount of the deemed interest benefit that would have been included in the non-resident’s income under section 15, if the non-resident were taxable under Part I on this benefit. This deemed dividend under paragraph 214(3)(a) is subject to Part XIII tax under subsection 212(2).

2.42 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.

2.43 Where subsection 80.4(2) results in a deemed interest benefit to a non‑resident, section 80.5 applies. It deems 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 borrowed money for purposes of paragraph 20(1)(c) (see ¶2.39). A deduction under paragraph 20(1)(c) may be claimed where the proceeds of the loan are used to earn income in Canada that is taxable under Part I, provided the other requirements of paragraph 20(1)(c) are met. For information on deductions under paragraph 20(1)(c), see Income Tax Folio S3‑F6‑C1.

Application

This Chapter, which may be referenced as S3‑F1‑C2, is effective April 10, 2025 and replaces and cancels ¶6 ¶7, ¶10, ¶12, ¶13 and ¶26 of Interpretation Bulletin IT‑421R2, Benefits to individuals, corporations and shareholders from loans or debt. Any technical updates from the cancelled paragraphs of the 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 80.4(2) (also section 80.5, subsections 15(1), 15(1.2), 15(2), 15(2.16) to 15(2.192), 15(9), 80.4(1), 80.4(3) , 80.4(7), 80.4(8) and 212(2), paragraphs 20(1)(c) and 214(3)(a) of the Act and sections 4300 and 4301 and paragraph 200(2)(i) of the Regulations).