Loans between corporations are normal; the danger is specific
Start with the reassurance, because it is genuine: there is nothing improper about one of your companies funding another. Groups do it constantly, to cover a shortfall, to fund a renovation, to move surplus somewhere safer. The shareholder-loan rule that people half-remember, the one that throws an unpaid loan into income, targets loans from a corporation to its individual shareholders and people connected to them; a loan to a shareholder that is itself a corporation resident in Canada sits outside that rule. So the bare fact that your companies lend to each other is not a problem.
What turns normal into problem is specific and predictable. In practice we see four failure modes: the loan that exists only as a line in a ledger with no agreement behind it; the loan that is really a conduit moving corporate cash into someone's personal hands; the balance that everyone knows will never be repaid but nobody has dealt with; and the group whose statements have become unreadable to its own bank because intercompany balances swamp them. Each has its own fix, and all four are cheaper to fix before an audit, a credit review or a death forces the issue.
Direction decides most of the risk
Before anything else, look at who is lending to whom, because the tax and risk consequences run along the arrows. The same dollar amount can be routine in one direction and expensive in another:
| Direction | Usual verdict | The catch |
|---|---|---|
| Holding company down to an operating or realty company | Routine | The loan sits unsecured in the riskiest entity unless security is taken and registered; an unsecured holdco ranks behind the bank |
| Operating company up to the holding company | Routine, often wise | Moves surplus away from operating risk, but should be papered, or done as a dividend along the ownership line instead |
| Sister company to sister company | Fine with paper | No ownership link means no dividend route; the loan agreement is the only thing giving the balance a legal character |
| Any company to a shareholder personally | The dangerous one | Included in the shareholder's income unless repaid within one year after the corporation's year-end, plus an imputed interest benefit while outstanding |
The last row deserves its own warning, because groups drift into it sideways. When corporate cash is lent to a sister company and that company mostly funds the shareholder's personal spending, the interposed corporation does not sanitize anything: the rules look through arrangements that route money to a shareholder through intermediaries, and repay-and-reborrow patterns around year-end are exactly what CRA looks for. Keep the corporate lending layer and the personal layer strictly apart, and take personal cash out as salary or dividends, which are covered properly in how salary and dividends mix.
Paper, interest and actual movement keep a loan a loan
A loan is a legal claim of one corporation against another, and it should look like one: a written agreement stating the amount, whether interest applies, the repayment terms and any security, approved by resolutions on both sides, with the balance actually moving over time. None of that is expensive. All of it is what separates a loan from a balance that CRA, a lender or a litigant is free to recharacterize into something worse.
Interest is optional more often than people expect. Between related Canadian corporations there is generally no rule forcing interest onto an intercompany loan; this is a domestic question, and the considerations are practical rather than punitive. The real analysis is deductibility and tracing: interest is deductible when borrowed money is used to earn income, so if a company that itself pays interest to the bank on-lends interest-free to a sister, its own deduction can be exposed, and if the borrowing company pays interest, that interest is deductible only if the funds went to earning income. Decide interest deliberately, write it down, and actually accrue it if you charge it.
Movement matters as much as paper. A balance that only ever grows, year after year, with no repayments and no terms, gradually stops looking like a loan at all and starts looking like a permanent transfer that was never taxed as one. The monthly recording discipline that keeps every balance named and mirrored across both sets of books is its own topic, covered in how intercompany transactions should be recorded; loans are simply the category where that discipline pays off most.
Forgiving a loan is a tax event, not a cleanup
You cannot simply journal a dead balance away, because settling a debt for less than its face amount triggers the debt forgiveness rules. The forgiven amount does not vanish: it is applied against the borrowing company's tax attributes, grinding down loss carryforwards first and then the cost bases of its property, and a portion of anything left over can land directly in the borrower's income. A casual write-off intended to tidy the books can therefore destroy losses the group was counting on, or create taxable income in a company with no cash.
There are orderly exits, and choosing between them is the actual planning. The balance can be repaid over time from real cash flow; it can be settled by set-off where the two companies owe each other; it can be cleared with a dividend where the ownership line runs the right way; or the debt can be capitalized, converted into shares of the borrower, which changes the group's structure but avoids a forgiveness. Which exit fits depends on the direction of the balance, the attributes in the borrower and what the group needs next, and it is precisely the kind of defined-scope question we handle as Strategic Projects.
What your lenders and your statements are telling you
Intercompany loans reshape financial statements, and lenders read them with a discount. Balances gross up both sides of the group's balance sheets, covenant ratios computed on a single borrower swing with them, and a credit analyst who cannot tell whether a receivable from a related company is collectible will treat it as worthless and may require the whole balance formally postponed behind the bank's debt. Our founder came out of banking and corporate finance, and the pattern from that side of the table is consistent: files stall not because intercompany debt exists, but because nobody can explain it.
The loans are also part of your asset protection, in both directions. A holding company that lent millions down into an operating company holds an unsecured claim inside the entity most likely to be sued, unless it took security and registered it, in which case it stands in line ahead of unsecured creditors. Whether the walls between your companies actually hold is the subject of separating property ownership from operating risk; unexamined loan balances are the most common hole in those walls.
Finally, the balances follow you into every valuation. When shares are being valued for a sale, a freeze or an estate, every intercompany balance is an asset of one company and a liability of another, and the numbers have to be real; reconciling them is routinely the first task a business estate planning CPA in Ontario performs on a new file, because nothing else can be settled until they are. A group carrying large, stale balances is quietly making its own succession harder every year.
What changes the answer
Whether your lending pattern is fine or a liability turns on six facts:
- Direction: corporation-to-corporation is routine; anything that reaches an individual shareholder is a different and harsher regime.
- Paper: agreements, resolutions and terms exist, or the balances are open to recharacterization.
- Interest and tracing: who pays interest to outsiders, and whether on-lending interest-free puts a deduction at risk.
- Movement: balances that get repaid look like loans; balances that only grow do not.
- Collectibility: a balance the borrower can never repay needs an orderly exit before the forgiveness rules choose one for you.
- Who is reading: an imminent credit review, audit or estate event moves all of this from background to urgent.
If you want a quick, honest read on your own balances, a one-time consult is often enough to name each one and flag the two or three that need work; ongoing groups get this as part of monthly reporting. Sometimes the honest conclusion is that the balances exist only because there are more companies than purposes, in which case the better fix is structural, and that question is next: should related real estate corporations be amalgamated?
