Income Tax Folio S3-F1-C1, Shareholder Loans and Debts, April 10, 2025

Characterizing as loan

• 1.14 The determination of whether a loan has been received or a debt incurred is not based on accounting entries, which might not reflect the substance of a transaction.

Overview

1.18 … 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.

Ordinary course exception

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

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.

• 1.33 A trade debt is considered to arise in the ordinary course of a creditor's business, where it arose from the sale of goods or services by the creditor to a debtor, and the payment terms are the same as those provided on sales to other customers of the creditor.

Bifurcation

• 1.39 Where a borrower has a total balance of loans owing to a corporation and only a portion was used for one of the described purposes, the borrower must be able to prove that the portion used for the described purpose meets all the conditions necessary for an exception under s. 15(2.4).

Dwelling requirements

• 1.47 The word dwelling includes a house, an apartment and a duplex or apartment building, a condominium, a cottage, a mobile home, a trailer, or a houseboat.
• 1.48 For purposes of S. 15(2.4)(b), the dwelling does not need to be located in Canada and need not be the principal residence of the employee or the employee's spouse or common-law partner.
• 1.49 The individual who received the loan must actually inhabit the dwelling unless exceptional circumstances intervene, such as death, illness, fire, or transfer to another employment location.

Proration

1.50 Where the individual acquired two or more housing units, the exception in s. 15(2.4)(b) only applies if the loan is no greater than the proportionate cost of one housing unit actually inhabited by the individual and a proportionate cost of the area of land that is reasonably required for the use and enjoyment of that dwelling.

Limited refinancing exception

• 1.51-1.52 Although a loan made for the purpose of refinancing an existing indebtedness that was previously incurred by an employee to acquire a dwelling will generally not meet the requirement of having been made to enable or assist the acquisition of the dwelling, there is an exception for where the lender made a commitment to an individual on or before the individual's acquisition of the dwelling to provide permanent financing and in the interim, the individual used interim financing, such as construction financing, to construct or otherwise acquire the building.

Purpose of acquiring shares for employee’s own benefit

• Disposing of 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, including dispositions to the corporation.

Purpose of acquiring shares for employee’s own benefit

• Disposing of 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, including dispositions to the corporation.

Bona fide repayment arrangements

• 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. For example, this requirement generally would not be satisfied where the loan is to be repaid once shares achieve a certain fair market value.
• 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 S. 15(2.3).

Requirement to amend return where s. 15(2.6) not satisfied

• 1.73 Since it is not known whether the requirements of s. 15(2.6) are met until one year after the end of the lender's taxation year in which the loan was made, the borrower's tax return for the year in which the loan was made must be amended to include the amount in income if the required repayment is not made.

FIFO application of repayments

• 1.81 Repayments are applied on a first-in, first-out basis (i.e., to the oldest loan first) when a shareholder has more than one loan outstanding at the time of repayment, unless the facts clearly indicate otherwise.

Repayment by set-off or application of dividends or bonus

• 1.82 A loan can be considered to have been repaid by way of set-off against a receivable of the borrower. The set-off represents a legal discharge of the loan as evidenced by the circumstances. Repayments can also be made by applying dividend, salary, or bonus payments against an outstanding loan.

Series of loans and repayments

• 1.84 The purpose of the series of loans or other transactions and repayments rule in s. 15(2.6) is to prevent a taxpayer from perpetually deferring tax by using new loans to repay existing loans. 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 the loan is repaid before the end of the taxation year of a lender and an amount is reborrowed.

Bona fide commercial loan exception

• 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.

S. 20(1)(j) deduction by estate

• 1.78 A deceased shareholder's estate may be able to claim an s. 20(1)(j) deduction when the legal representative of the estate makes a repayment of a loan that was owed by the shareholder at the time of death, with the deduction being claimed in the year the loan is repaid, provided the deceased shareholder had included the amount of the loan in income under s. 15(2) in a prior taxation year.

Deferred imposition of Part XIII tax

1.90 … If there is no series of loans or other transactions and repayments, the non-resident who has received a loan in a particular taxation year cannot be deemed to have received a dividend until one year after the end of the lender's tax year. This allows for 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 to 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. …

Assignment of loan before repayment

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.

Loan qua shareholder

• 1.59 Factors that may indicate that a loan made by a corporation to a shareholder-employee arose because of a shareholding include that the corporation only provides loans to shareholders, the terms are more favorable than those provided to non-shareholder employees, the shareholder can significantly influence the business decisions of the corporation, the loan amount was significant relative to the retained earnings of the corporation, or the loan was for a significant amount, but the corporation did not require any security therefor.