Loans or Guarantees to a Business

If you provide a loan or a loan guarantee to a business it is essential that there is a written agreement even if it is for your spouse or child. I am not talking about whether they are trustworthy. That is whole other discussion. I am just talking about the tax consequences if it is not paid back.

A good illustration of this is a Tax Court of Canada case. In this situation a mother guaranteed a business loan for her son’s corporation. She tried to deduct the losses on her tax return. It was denied. She had no expectation of investment income so no deduction is allowed.

What could she have done differently? She could have had an agreement that the corporation had to pay her an annual guarantee fee. This would have made all the losses deductible.

Another common situation is a loan. The same principle applies in this situation as well. There needs to be a loan agreement detailing the terms. The interest rate needs to be specified.

When people go into these arrangements for relatives they still need a written agreement or tax deductions will be lost.

The Allowable Business Investment Loss (ABIL) can be used for these losses but there is a requirement that there was a potential of investment income. The written signed agreement provides you the evidence needed.