Shareholder Loans
Shareholder Loans
Income Tax Act s. 15(1.2), s. 15(2), s. 80.4(2), s. 110(1)(j), Regulations s. 4301(a),(c)
Prescribed Interest Rates
The prescribed interest rates for calculating taxable benefits from low-interest and interest-free loans to employees and shareholders are set quarterly, and can be found in our table of prescribed interest rates. For these types of loans, the interest rate changes when the prescribed rate changes, unlike prescribed rate loans to spouses and children, which always use the rate in effect at the start of the loan.
The prescribed interest rate for shareholder loans was 1% from July 1, 2020 to June 30, 2022, and has increased steadily since then, to 4% January 1, 2023, 5% April 1, 2023, and will be 6% starting January 1, 2024.
The prescribed rate for a quarter is based on the average yields for 3-month treasury bills sold at auction for the month that is 3 months prior to the start of the quarter. Thus, the rate for Q1 2024 starting January 1, 2024 is based on the average yields in October 2023.
Deemed Benefit From Shareholder Loan Not Repaid
A loan by a corporation to one of its shareholders, or to a person or partnership who does not deal at arm's length with the shareholder, may result in a deemed taxable benefit to the shareholder.
If a person or partnership is:
a shareholder of a corporation
connected with (not dealing at arm's length with) a shareholder of a corporation, or
a member of a partnership, or a beneficiary of a trust, that was a shareholder of a corporation,
and because of that shareholding, the person or partnership received a loan or incurred a debt to:
bullet that corporation,
bullet a corporation related to that corporation, or
bullet a partnership of which that corporation or any related corporations was a member,
then, under s. 15(2), the loan amount will be included in the income of the person or partnership for the year in which the loan is made, except in certain circumstances. S. 15(2) does not apply if the entire loan is repaid within 1 year after the end of the taxation year of the lender, as long as the repayment was not a part of a series of loans or other transactions and repayments. See IT119R4 (Archived) for more exceptions, including some loans made for specific purposes. See Mazzaferro v. The Queen, 2019 TCC 147 regarding a loan to a person not dealing at arm's length with the shareholder. This is discussed in the September 2019 Life in the Tax Lane video.
Deemed Benefit From Unpaid Interest
Another benefit will be deemed to have been received by the shareholder under s. 80.4(2), unless interest has been paid on the loan in an amount greater than or equal to interest calculated at the prescribed rate for the period in the year during which it was outstanding. See the link at bottom to the CRA information on loans received because of shareholdings.
The payment of interest must be made no later than 30 days after the the end of the year. If the entire loan is repaid before the end of the year, any unpaid interest will still be a deemed benefit under s. 80.4(2) if it is not paid within 30 days after the end of the year.
There will be no taxable benefit related to the interest on any debt or loan on which it is reasonable to conclude that the rate of interest is the same as or greater than that which would have been agreed upon by parties dealing at arm's length, having regard to all the circumstances, including the terms and conditions of the debt.
The interest on the shareholder loan is calculated at the prescribed interest rate for the period (days) in the year that the loan is outstanding. If the prescribed rate changes during the loan period, the interest calculation uses the revised rate.
This differs from the interest for loans to spouses and children, which is always calculated at the prescribed rate in effect at the time the loan is created.
Shareholder Loan Example
Mr. X is a shareholder of Corporation Y, which uses the calendar year for its taxation year. On January 1, 2019, Mr. X is loaned $100,000 by the corporation. No principal repayments or interest payments are made on the loan in 2019.
If Mr. X repays the loan by the end of 2020, then the $100,000 will not be a deemed benefit (in 2019), as long as the repayment is not part of a series of loans or other transactions and repayments.
Depending on the interest rate paid by Mr. X compared with the prescribed interest rate for shareholder loans, there may be a taxable benefit under s. 80.4(2) of the Income Tax Act.
Using the prescribed interest rates, the loan interest for 1 year from January 1 to December 31 2019 would be $2,000, calculated as:
$100,000 x 2% = $2,000
Assume Mr. X paid $1,000 of interest on the loan, on Jan 3, 2020 (within the year or 30 days thereafter):
bullet The result is a taxable benefit of $1,000 ($2,000 interest less $1,000 repaid) in 2019 to Mr. X.
Assume Mr. X did not pay any interest within 30 days of the end of 2019:
bullet The result is a taxable benefit of $2,000 in 2019 to Mr. X.
If the loan is not repaid in full by the end of 2020:
bullet Any unpaid portion will be included in Mr. X's income for 2019.