Shareholder Loan Note Template for Canada

A Shareholder Loan Note is a critical legal document that formalizes debt financing arrangements between shareholders and their company in Canada. When you need to provide funding to your corporation while maintaining a clear debt structure, this document ensures compliance with federal and provincial laws while protecting your financial interests.

When do you need this document?

You need a Shareholder Loan Note when providing capital to your company as debt rather than equity investment. This situation commonly arises when you want to maintain flexible repayment terms, preserve your shareholding percentage, or take advantage of specific tax benefits available to debt financing. The document becomes essential when your company requires immediate funding but you prefer not to increase share capital or bring in external lenders. You'll also need this agreement when restructuring existing informal loans to ensure proper documentation and tax compliance.

Key legal considerations

Several critical legal elements must be addressed in your Shareholder Loan Note. The interest rate must comply with prescribed rates under the Income Tax Act to avoid deemed benefit calculations, and the terms must reflect a genuine arm's length lending arrangement to prevent CRA recharacterization as a dividend. You need proper corporate authorization through board resolutions and potentially shareholder consent, depending on your company's constating documents. The agreement should include clear repayment terms, security provisions if applicable, and subordination clauses that address the loan's priority relative to other corporate debt. Documentation must demonstrate the loan's commercial reasonableness and your intention to collect repayment.

Legal requirements in Canada

Under the Canada Business Corporations Act, your company must have proper authority to borrow funds, typically requiring board approval and compliance with any borrowing restrictions in the articles of incorporation. The Interest Act mandates specific disclosure requirements for interest calculations and payment terms. Provincial securities legislation may apply if the loan note constitutes a security, potentially requiring compliance with prospectus or exemption requirements. The Criminal Code's usury provisions cap effective annual interest rates at 60%, while the Income Tax Act includes specific rules for shareholder loans, including deemed disposition rules and prescribed interest rate requirements. Your agreement must also consider potential implications under insolvency legislation, particularly regarding preferences and related party transactions if the company faces financial difficulties.