Intercompany Loans: Mitigating Tax Risks under Canadian Law
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What Is A Bona Fide Loan?
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Making Your Loan Bona Fide
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- Formal Loan Agreement: The most critical step is creating a formal written loan agreement between the lending and borrowing companies. This agreement should clearly define the amount of the loan, the repayment schedule, interest rates, and any collateral provided.
- Appropriate Interest: Ensure that the interest charged on the loan is consistent with market rates, and at very least, at the prescribed CRA rate. A low or non-existent interest rate could lead the CRA to classify the loan as income.
- Fixed Repayment Schedule: A bona fide loan should have a fixed schedule of repayments, demonstrating that the borrowing company has a plan and capacity to repay the loan.
- Evidence of Repayments: Actual repayments, especially in accordance with the loan agreement, add legitimacy to the loan in the eyes of the CRA.
- Security or Collateral: Providing security or collateral for the loan suggests that the lending company expects repayment, contributing to the loan's bona fide status.
- Documentation: Keep meticulous records. Evidence that the loan has been treated as such by both companies can be crucial in demonstrating its bona fide nature to the CRA.
Risks and Penalties
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