Can a company lend money to a director or employee in Canada?

Whether a company can loan money to a director or employee depends on the statute it was incorporated under, its own documents and the tax rules. This page looks at federal rules, which matter to a seller tidying the books and to a buyer reviewing loans owed to or by the company. A company incorporated under a provincial statute follows that province’s corporate statute, which this page does not cover.

Disclosure under the CBCA

Section 120(1) of the Canada Business Corporations Act says a director or officer must disclose to the corporation, in writing or by requesting that it be entered in the minutes, the nature and extent of any interest in a material contract or material transaction with the corporation, in the cases the subsection describes. Whether a particular loan is a material contract or transaction is a question for the company’s lawyer.

Voting and what disclosure protects

Section 120(5) says a director required to make a disclosure shall not vote on a resolution to approve the contract or transaction, subject to the exceptions listed in that subsection. Corporations Canada says directors and officers must disclose in writing any personal interest they have in a contract with the corporation. It adds that failure to do so could result in a court setting aside the contract on application by the corporation or a shareholder.

Tax rules in the Income Tax Act

Section 15(2) of the Income Tax Act can bring a loan from a corporation to a shareholder, or to a person connected with a shareholder, into that person’s income; it does not apply where the borrower is a corporation resident in Canada. It is subject to exceptions. One, in s.15(2.6), covers a loan repaid within one year after the end of the lender’s taxation year in which it was made, where it is established that the repayment was not part of a series of loans or other transactions and repayments. For employees, s.80.4(1) deems a benefit in the circumstances it states when a loan is received because of an office or employment. Have an accountant review any loan on the books.