For Canadian entrepreneurs who operate multiple incorporated entities, transferring cash between corporations is routine. A profitable operating company might fund a newer venture, or cash might move to a sister corporation to cover seasonal working capital. However, treating corporate bank accounts as interchangeable pools of capital without strict legal and tax formalities is one of the most common triggers for Canada Revenue Agency (CRA) reassessments.

1. The Common Trap: Sibling Companies vs. Parent-Subsidiary

A fundamental tax distinction exists between transfers within a parent-subsidiary structure versus transfers between sister companies (companies owned by the same individual shareholder):

  • Parent-Subsidiary (Holding Co & Operating Co): Surplus funds can typically be moved vertically as tax-deferred intercorporate dividends under Section 112 of the Income Tax Act (ITA), subject to Part IV tax rules where applicable.
  • Sister Companies (Horizontal Transfers): When Company A transfers funds directly to Company B—both owned by Individual X—there is no direct shareholding link between the two companies. The CRA frequently scrutinizes these advances to determine whether the transaction conferred a benefit on Individual X.

2. Critical Statutory Triggers Under the Income Tax Act

Subsection 15(2): Shareholder Debt Rules

Under Subsection 15(2) of the ITA, if a corporation makes a loan to a shareholder or a "connected person" (which includes an affiliated corporation), the entire principal amount can be included in the debtor's taxable income unless specific statutory exceptions are met. If Company A advances money to Company B, the CRA may take the position that Company A effectively made a loan to benefit the common shareholder.

Subsection 80.4(1): Deemed Interest Benefits

Even when a loan is acknowledged as legitimate debt, if it is issued interest-free or at an interest rate lower than the CRA's prescribed interest rate, Subsection 80.4(1) deems a taxable interest benefit. The difference between the prescribed rate and the actual interest paid is taxable to the borrower annually.

Part IV Tax and Capital Dividends

Attempting to resolve unmonitored intercompany loan balances at year-end by declaring retro-active dividends can trigger unexpected Part IV refundable taxes or capital dividend account (CDA) allocation errors if not calculated with precision.

3. Four-Point Compliance Checklist for Corporate Owners

To protect your business group against costly CRA reassessments, every intercorporate advance must satisfy four non-negotiable legal and accounting requirements:

  1. Execute a Formal Promissory Note: Draft a legally binding agreement specifying the principal, interest rate (at or above the CRA prescribed rate), and clear repayment terms.
  2. Pass Corporate Minute Book Resolutions: Ensure the boards of directors of both lending and borrowing corporations formally approve the loan and record it in the corporate minute books.
  3. Pay Annual Interest Promptly: Interest accrued under Subsection 80.4 must be paid no later than 30 days after the end of the calendar year to avoid deemed benefit reassessments.
  4. Avoid Year-End Rollovers: Series of loans and repayments engineered solely to avoid the "one-year-after-year-end" rule under Subsection 15(2.6) will be disallowed under Subsection 15(2.7).