By Maureen E. Liviniuk,
Certified Management Accountant - www.MLiviniukCMA.com

In owner managed companies, owners often inject personal cash into the business in the form of shareholder loans. Usually this occurs without any documentation other than a cheque drawn on the personal account of the owner, or receipts for business expenses paid by the owner. Unfortunately, like having uninsured property, by the time the owner realizes that a written agreement is required, it is too late.

Business owners who lend monies to their companies should consider both a promissory note and a general security agreement. The promissory note is an agreement to pay between the lender (the owner) and the borrower (the company) and must specify the interest rate and repayment terms. The specified interest rate should minimally be the rates prescribed by Canada Customs and Revenue Agency (CCRA) for non-arms-length transactions as this demonstrates the intent of the borrowing to earn income. Having a promissory note that meets these criteria may allow the owner, in the event of business cessation, to deduct the loan as an Allowable Business Investment Loss, which is deductible against other sources of income, rather than a capital loss, which is only deductible against capital gains.

The General Security Agreement (GSA) provides security for the shareholder loan. The GSA allows the owner to rank ahead of unsecured creditors in the event that the business ceases.