Can a holding company lend money to its subsidiary in Canada?

People who ask whether a holding company can give a loan to a subsidiary are asking two things: is it allowed, and what has to be done properly. Nothing in the corporate statutes we checked bars one company from lending to another it owns. The limits come from the company’s own documents, the duties of its directors, and tax law.

Capacity and the company’s own documents

Under section 15(1) of the Canada Business Corporations Act, a corporation has the capacity and, subject to the Act, the rights, powers and privileges of a natural person. Ontario’s Business Corporations Act, section 15, uses similar words. A company incorporated in another province is governed by that province’s statute. Read the articles and any unanimous shareholder agreement first, since either can restrict what directors may do.

What the directors must do

Subject to any unanimous shareholder agreement, the directors manage or supervise the management of the business and affairs of a corporation. Each director and officer must act honestly and in good faith with a view to the best interests of the corporation. Each company has its own board, so ask each board to record why the loan is in the best interests of that company.

Overlapping directors

Directors may sit on both boards. Under section 120(1) of the federal Act, a director or officer must disclose the nature and extent of an interest in a material contract or material transaction with the corporation, in writing or by requesting to have it entered in the minutes, if, among other cases, the director or officer is a director or officer of a party to it. Section 120 of the federal Act sets out the detail and its exceptions, so check it against the facts.

Tax treatment of the interest

Under paragraph 12(1)(c) of the Income Tax Act, subject to subsections 12(3) and (4.1), interest received or receivable in the year, depending on the method the taxpayer regularly follows, is included in income, and interest paid on borrowed money used to earn income from a business or property can be deductible, within the conditions of paragraph 20(1)(c). Whether a particular loan meets those conditions is for an accountant to confirm.