Tax implications of Intercorporate loans

In cases where a taxpayer owns multiple incorporated businesses. Its fairly common for there to be intercompany loans between those related corporations. The general guiding principle is that; should these loans be deemed not bona fide and/or not at arm’s lengths, they will be included into income of the taxpayer receiving the benefit (loan).

Bona fide

As alluded to above, there will be no tax consequences if the the intercorporate loans are bona fide , and what is deemed bona fide is determined on a case by case basis.

Nevertheless , factors that are considered include , whether there are loan agreements in place including repayment plans , whether market based interest or prescribed interest is payable on those loans etc.

In layman terms, there needs to be evidence that the loans were not issued for the purposes of permanently transferring funds/value, from one corporation to another with no reasonable expectation of repayment.

Interest free loans

Can intercorporate interest free loans be considered bona fide such that no tax implications can arise from the interest ?

This question is covered by Section 80.4 (2) of the Income tax act, which I have paraphrased as follows ; an interest benefit will be included in the income of a shareholder of a corporation , or persons who are connected to the shareholders of the lender corporation ; who by virtue of the shareholding, receives a loan from the corporation.

In effect , this means a shareholder or persons connected to the shareholder of a corporation is deemed to have received interest benefit on any interest free loans that are issued as a result of that shareholding.

There are exceptions ; Section 80.4 (2) nevertheless excludes corporations that are resident in Canada from this provision. With that in mind ; if interest free intercorporate loans are issued between two related corporations resident in Canada , no tax consequences arise from the interest that is otherwise deemed payable in that transaction.

Conclusion

The points to keep in mind here are that; issuing loans between corporations that are related does not result in any tax consequences to the extent the loans are not an attempt to permanently transfer value from one corporation to another. Likewise the loan can also be interest free and no tax consequences can arise to the extent the receiving corporation is a corporation resident in Canada