Subject to certain exceptions, where a shareholder (other than a corporation resident in Canada) of a corporation is indebted to the corporation (a “Shareholder Loan”), the shareholder is deemed by subsection 80.4(2) to receive an interest benefit to the extent that the notional interest on the Shareholder Loan, calculated at the prescribed rate, exceeds the interest actually owing and paid. However, for a Shareholder Loan that was included in computing the income of a person under Part I of the Income Tax Act (for example under subsection 15(2)), paragraph 80.4(3)(b) provides that no subsection 80.4(2) interest benefit is deemed to have been received.
Accordingly, a Shareholder Loan may be subject to either subsection 15(2) or subsection 80.4(2), but not both. If a Shareholder Loan is repaid within one year after the lender’s year-end, subsection 15(2.6) provides that subsection 15(2) does not apply, with the result that there is no income inclusion in respect of the Shareholder Loan. Instead, the shareholder includes a deemed section 80.4 interest benefit for the time that the loan was outstanding.
If a Shareholder Loan is repaid after the subsection 15(2.6) time period, subsection 15(2) continues to apply but the shareholder is instead entitled under paragraph 20(1)(j) to a deduction equal to the amount repaid in the year of the repayment.
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