Intercompany Promissory Note Template for Canada

An Intercompany Promissory Note is a formal legal document that establishes a debt relationship between affiliated companies within the same corporate group. Under Canadian law, this instrument must comply with the Bills of Exchange Act and relevant provincial corporate legislation while addressing complex tax considerations under the Income Tax Act.

When do you need this document?

You need an Intercompany Promissory Note when one company within your corporate group provides financial assistance to another affiliate. This commonly occurs during corporate restructuring when a parent company advances funds to a subsidiary for expansion or operational needs. The document is essential when documenting existing informal loans between related companies to satisfy auditor requirements or regulatory compliance. You'll also require this note when establishing formal lending arrangements between sister companies or when converting accounts payable/receivable into formal debt instruments for tax planning purposes.

Key legal considerations

The promissory note must contain an unconditional promise to pay a specific amount, clearly identifying both the maker (debtor company) and payee (creditor company) with full corporate details. Interest rate provisions require careful consideration to ensure arm's length compliance under transfer pricing rules, as Canada Revenue Agency scrutinizes intercompany interest rates for reasonableness. Default provisions should specify events of default and remedies available to the creditor, while payment terms must clearly outline the repayment schedule or demand nature of the obligation. Corporate authorization clauses ensure the note is properly executed by authorized officers, and guarantee provisions may be included when a parent company backs the obligation of a subsidiary.

Legal requirements in Canada

Under the Bills of Exchange Act, your promissory note must be in writing, signed by the maker, and contain an unconditional promise to pay a sum certain in money. Provincial Business Corporations Acts require proper corporate authorization through board resolutions or officer certification, particularly for material transactions that may affect shareholder interests. The Income Tax Act imposes transfer pricing obligations, requiring intercompany interest rates to reflect arm's length terms that unrelated parties would negotiate. Documentation must support the business purpose of the loan and demonstrate that the interest rate aligns with comparable market rates. Provincial securities legislation may apply if the note constitutes a security, requiring compliance with prospectus or exemption requirements depending on the circumstances and relationship between the parties.