Chapter History S3-F1-C2, Deemed Interest Benefit on Shareholder Loans and Debts

Introduction

The purpose of a Chapter History page is to highlight any amendments to the information contained in a chapter of an income tax folio, including amendments to the information originally contained in an interpretation bulletin that has been cancelled and replaced with a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c.945, as amended.

Update April 10, 2025

General

Income Tax Folio S3-F1-C2, Deemed Interest Benefit on Shareholder Loans and Debts, replaces and cancels ¶6, ¶7, ¶10, ¶12, ¶13 and ¶26 of Interpretation Bulletin IT‑421R2, Benefits to individuals, corporations and shareholders from loans or debt.

In addition to consolidating the content of the former paragraphs of the interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin paragraphs are described below.

Legislative and other changes

¶2.3 has been added to provide readers with a cross‑reference to the Folio that provides information on determining when corporations are related.

¶2.5 has been added to clarify the meaning of the term person as it is used in this Chapter.

¶2.7 has been added to reflect the legislative amendment made to subsection 80.4(8) by S.C. 2013, c. 34, s. 216(1). The amendment clarified that a partnership can be connected with a shareholder of a particular corporation for purposes of subsection 80.4(2) if that partnership does not deal at arm’s length with, or is affiliated with, the shareholder. The amendment is effective in respect of loans made and debts arising after October 31, 2011.

¶2.9 and 2.10 have been added to provide readers with general information on when loans or debts may be considered to exist for purposes of subsection 80.4(2). Readers are also advised of the potential application of subsection 15(1) if a shareholder extracts money or property from a corporation and the evidence does not support the conclusion that the money or property was received as a loan or a debt.

¶2.11 has been added to clarify that tax consequences are not determined by accounting entries or what a taxpayer might have done or intended to do, but are determined by the reality underlying the accounting entries and the transactions that the taxpayer actually undertook.

¶2.15 (formerly included in ¶10 of IT‑421R2) has been revised to clarify that it is necessary for a taxpayer to determine whether subsection 15(2) applies to a particular loan before considering whether subsection 80.4(2) applies.

¶2.17 to 2.19 have been added to reflect a legislative amendment made by S.C. 2024, c. 15, s. 16 (formerly Bill C-59) which added paragraph 80.4(3)(c) to the Act, effective January 1, 2024.

¶2.20 to 2.23 (formerly ¶13 of IT‑421R2) have been revised and expanded to provide readers with an understanding of some of the factors that are considered in determining whether a loan was received by virtue of shareholding or by virtue of employment.

¶2.25 and 2.26 (formerly ¶6 of IT‑421R2) have been expanded to clarify that subsection 80.4(2) can apply to a loan as long as any portion of it remains outstanding. These paragraphs also clarify the calculation of interest where the amount of the loan decreases during the tax year. The comments have also been revised to reflect the legislative amendments made by S.C. 2016, c. 12, s. 5 and s. 24. These amendments introduced rules for applying subsections 15(2) and 80.4(2) in the context of back‑to‑back shareholder loan arrangements. For single intermediary arrangements, the amendments are effective for loans received and debts incurred after March 21, 2016. Transitional rules will apply for loans received and debts incurred before March 22, 2016 and that are still outstanding on that date. For multiple‑intermediary arrangements, the amendments are effective for loans received and debts incurred after December 31, 2016 and transitional rules will apply for loans received and debts incurred before January 1, 2017 and that are still outstanding on that date.

¶2.27 (formerly ¶12 of IT-421R2) has been expanded to include a cross‑reference to the Canada.ca website where readers can access prescribed rates of interest for any particular quarter, dating back to 2006.

Example 2 (similar to the example previously found in ¶6 of IT-421R2) has been revised and expanded to use lending and prescribed interest rates that are more representative of current rates.

¶2.28 to 2.30 (formerly included in ¶7 of IT-421R2) have been expanded to clarify that subsection 80.4(2) can apply when the loan is received from a related corporation or a partnership where the related corporation, or the corporation in which the shareholder owns shares, is a member of the partnership. The paragraphs also clarify the circumstances in which the shareholder may have a shareholder benefit under subsection 15(1) rather than a deemed interest benefit under subsection 80.4(2).

¶2.31 (formerly included in ¶17 of IT-421R2) has been revised to clarify that where a borrower is a partnership, subsection 80.4(2) first applies in the fiscal period of the partnership in which the loan was received.

¶2.34 to 2.36 together with Examples 3 and 4 have been added to clarify how subsection 80.4(2) applies in respect of a loan to which subsection 15(2.6) may apply.

¶2.41 and 2.42 (formerly ¶26 of IT-421R2) have been revised and expanded to clarify that when paragraph 214(3)(a) applies, the amount of the deemed interest benefit is deemed to be a dividend paid from a corporation resident in Canada and the tax rate on that dividend may be reduced by the applicable tax treaty.

¶2.43 has been added to clarify the circumstances in which a deduction under paragraph 20(1)(c) may be available when a non‑resident is deemed to have received an interest benefit under subsection 80.4(2).