CRA has issued a new Folio on the s. 80.4 rules

CRA has issued a new Folio on the rules for imputing interest on shareholder loans, contained principally in s. 80.4. Points made by it include:

• CRA lists factors that it considers relevant to determining whether a shareholder received a loan qua shareholder or qua employee (relevant inter alia to whether the imputed benefit is from employment).
• Once a loan becomes subject to the s. 80.4 rules, it remains subject to those provisions for all taxation years as long as any part of it remains unpaid even if, for example, the taxpayer ceases to be a shareholder
• Where a borrower did not include a loan in income because it was expected that the s. 15(2.6) exception would apply, and an interest benefit was included under s. 80.4(2) in the borrower's tax return for the year in which the loan was received, then if the loan in fact is not repaid within the s. 15(2.6) time period, the borrower should amend the tax return for that year to remove the deemed interest benefit amount from income and to include the loan amount in income.
• Where s. 80.4(2) results in a deemed interest benefit to a non-resident borrower, s. 80.5 applies to deem the amount of the benefit to be interest payable in respect of the year pursuant to a legal obligation to pay interest on the borrowed money for purposes of s. 20(1)(c). Accordingly, a deduction under s. 20(1)(c) may be claimed where the proceeds of the loan were used by the non-resident to earn income in Canada that is taxable under Part I.

Neal Armstrong. Summaries of Income Tax Folio S3-F1-C2 Deemed Interest Benefit on Shareholder Loans and Debts, April 10, 2025 under s. 80.4(2). s. 80.4(3)(a), s. 80.4(3)(b), s. 80.4(3)(c). s. 80.4(1) and s. 80.5.