Intercompany Loans in Canada: Agreements, Approvals and Corporate Records

Money often moves between companies in a Canadian corporate group. A holding company may fund an operating subsidiary, one operating company may cover a temporary shortfall in another, or a company may advance funds during an acquisition or reorganization. Common ownership makes the transfer convenient; it does not make the legal and accounting questions disappear.

An undocumented balance can be difficult to characterize later. Was it a loan, capital contribution, dividend, management charge or payment on behalf of another entity? Which company can demand repayment? Was interest intended? Did directors consider the interests of each corporation? What happens if a lender, buyer, creditor or tax auditor examines the entry?

This guide focuses on the Canadian corporate-law paper trail for a typical private group. It does not determine tax deductibility, withholding, transfer pricing, thin-capitalization or foreign-affiliate consequences. Those questions depend on the entities, jurisdictions, use of funds and current tax law and should be modelled by a tax adviser.

Start by mapping every entity, owner and existing lender. Confirm the legal names, jurisdictions, directors, officers, fiscal year-ends and banking arrangements. Then identify the commercial purpose, amount, currency, timing and expected source of repayment. The transaction should make sense for both the lender and borrower, not only for the group viewed as one economic unit.

Our related-party transaction guide explains the broader governance framework. An intercompany loan applies that framework to a debt relationship that needs its own approvals, terms and records.

Review the articles, by-laws, unanimous shareholder agreements, shareholder agreements and existing financing documents of both corporations. They may reserve borrowing, lending, guarantees or security for director or shareholder approval or restrict related-party transactions.

Directors must exercise their powers for the corporation whose board they sit on. Overlapping boards do not erase that distinction. The lending corporation should consider liquidity, return, risk and the effect on its creditors and operations. The borrowing corporation should consider cost, repayment and alternatives.

Where a director or officer has an interest in a material contract or transaction, the Ontario Business Corporations Act contains disclosure and voting rules. Record the nature of the interest, the disclosure and how the board handled participation. Our director conflict-of-interest guide provides a fuller process.

The resolutions should identify:

• Lender, borrower, amount and currency
• Commercial purpose and material terms
• Interest or other consideration
• Security, guarantees and priority arrangements
• Authorized signatories and permitted amendments
• Conflict disclosures and abstentions where required
• Why the transaction is in the corporation's interests

Do not use one vague group resolution as a substitute for approvals by each entity. Separate resolutions create a clear record that each board considered its corporation. If the transaction is outside the ordinary course, material to a company or connected to a controlling shareholder, increase the level of documentation and advice.

The document can be a detailed loan agreement, a promissory note supported by terms, or another instrument suited to the risk. The amount alone does not determine complexity. A short-term unsecured advance between solvent companies may need fewer provisions than a multi-year cross-border facility secured over operating assets.

At minimum, address:

• Principal, currency and advance mechanics
• Permitted use of proceeds
• Interest rate or express no-interest treatment, subject to tax advice
• Payment dates, maturity and prepayment
• Events of default and remedies
• Representations and ongoing information
• Set-off, assignment and amendment
• Governing law and notices
• Security, guarantees and subordination if applicable

Avoid an “on demand” label unless the parties understand its accounting, limitation, liquidity and enforcement implications. Likewise, an interest-free loan may be legally possible in some domestic circumstances but still requires tax analysis and a commercial explanation.

If multiple advances will occur, establish a facility limit and a ledger procedure. Reconcile every draw and repayment to bank records. If companies routinely pay expenses for one another, specify whether those amounts become loans under the facility or are handled through separate service and reimbursement arrangements.

The signed document should agree with the accounting entries. A loan agreement showing one principal amount while the ledger accumulates unrelated charges creates uncertainty. Finance and legal teams should reconcile at closing and each year-end.

Set the legal terms only after the tax and accounting objectives are understood. Interest can create income to the lender and a potential deduction to the borrower, but deductibility depends on statutory requirements and use of borrowed money. Related-party and cross-border rules can alter the result.

Do not hard-code a prescribed rate from an old article or precedent. Rates and administrative positions can change. Ask the tax adviser whether a current prescribed rate, arm's-length support or other benchmark is relevant, and record the date and source used.

For cross-border loans, transfer-pricing rules may require arm's-length terms and contemporaneous support. Withholding tax, treaty benefits, foreign-exchange gains and losses, thin-capitalization and reporting may also matter. A domestic template is not a cross-border tax plan.

Accounting classification affects financial statements and covenants. Confirm current versus long-term treatment, accrued interest, impairment and related-party disclosure with the accountant. If the lender expects repayment only when cash permits, the written terms should not pretend there is a fixed near-term collection plan.

Create a short tax-and-accounting memorandum or obtain written instructions recording:

• Intended tax characterization
• Use of funds
• Interest methodology and payment treatment
• Cross-border filings or withholding, if any
• Financial-statement classification
• Year-end confirmation and reconciliation owner

Legal counsel should not invent these answers. Counsel uses them to draft terms that do not contradict the intended treatment.

An intercompany lender may take security over the borrower's personal property. A security agreement describes the collateral and obligations; perfection and priority can require registration under Ontario's Personal Property Security Act and, for some assets, additional steps or statutes.

Before granting security, review existing bank and equipment-finance documents. They may prohibit additional liens, require consent or demand that related-party debt be postponed. Registering security without addressing a senior lender can trigger default while delivering little practical priority.

Consider:

• Scope of collateral and excluded assets
• Existing registrations and lien searches
• Location and legal name of the debtor
• Bank consent, subordination or postponement
• Control or possession requirements for particular assets
• Renewal, amendment and discharge dates
• Enforcement responsibilities if the borrower defaults

Security should reflect a real enforcement decision. If the group would never permit the lender to seize the operating assets ahead of a bank or trade creditors, a broad registration may not achieve the assumed protection. Conversely, failing to document intended priority can disadvantage the lending company if the borrower becomes insolvent or is sold.

Real property, intellectual property and shares can require additional analysis. Do not describe a PPSA registration as a universal lien over every asset. Ask counsel to identify the collateral and perfection steps that apply in the relevant jurisdiction.

A loan should not be used to disguise a distribution or move value away from creditors. Directors should review the lender's cash needs, liabilities, covenants and foreseeable obligations before approving a material advance. The borrower should have a credible use and repayment path.

Prepare current financial information and record the board's considerations. That does not require predicting the future with certainty. It requires an informed decision based on reasonable information, not a retroactive resolution after the funds are gone.

Transactions near insolvency, enforcement, litigation or a sale deserve specialized advice. Insolvency statutes, fraudulent-conveyance principles and director duties can affect transfers within a group. A signed note is not a shield for a transaction intended to prejudice creditors.

If repayment will occur through dividends, management fees, an amalgamation or an asset sale, document those as separate steps subject to their own rules. Our business amalgamation guide explains why a reorganization has consequences beyond moving a ledger balance.

Review the loan whenever circumstances change: major losses, new senior financing, a sale process, ownership dispute or inability to pay interest. Amendments, waivers and postponements should be written and approved. Leaving an impossible maturity date on the books while everyone informally agrees not to enforce undermines the reliability of the records.

Place the signed loan document, board resolutions, conflict disclosures, tax instructions, security documents and lender consents in each corporation's minute book. Maintain a ledger showing advances, repayments, accrued interest and adjustments.

At each year-end:

1. 1.Confirm the balance between entities.
2. 2.Reconcile interest and payments to bank and general-ledger records.
3. 3.Review maturity, defaults, waivers and covenant compliance.
4. 4.Confirm current tax and financial-statement treatment.
5. 5.Renew or amend security registrations where necessary.
6. 6.Record any material amendment with proper approvals.

Use reciprocal confirmations signed or approved by both finance teams. A balance recorded as a receivable by one company but equity or an expense by the other is a red flag.

If a company is being sold, expect the buyer to ask whether the loan will be repaid, assigned, capitalized, forgiven or remain outstanding at closing. Each option has legal, tax and purchase-price consequences. Deal with it in the letter of intent and closing statement, not after the transaction has been priced.

The corporate compliance checklist should include related-party balance review where a group uses these loans regularly. Repeated informal transfers are a process problem; a standing facility and monthly reconciliation may be more accurate than a new note for every payment.

Before advancing funds, confirm:

1. 1.Exact legal names, jurisdictions and ownership of lender and borrower.
2. 2.Commercial purpose, amount, currency, use and repayment source.
3. 3.Authority under articles, agreements and financing covenants.
4. 4.Director and officer conflict disclosures and board process.
5. 5.Tax and accounting instructions from the appropriate advisers.
6. 6.Loan terms, interest, maturity, default and amendment mechanics.
7. 7.Security, PPSA registration, bank consent and priority arrangements.
8. 8.Current financial evidence supporting the decision.
9. 9.Signed resolutions and documents in both corporate records.
10. 10.A ledger, confirmation and annual-review owner.

For cross-border, regulated, insolvent or creditor-sensitive situations, expand the team before funds move. The cost of documenting an ordinary loan is modest compared with reconstructing its purpose and priority during an audit, financing, dispute or sale.

Lamba Law's corporate advisory practice can prepare the corporate approvals and debt documents and coordinate with tax accountants and secured-lending counsel as the matter requires. This guide is general legal information. It does not determine whether interest is deductible, a rate is arm's length, security is perfected or a transaction is appropriate for a particular company.