A Director's Loan Agreement is a formal written contract between a Canadian corporation and one of its directors documenting the terms of a financial loan made between them. The loan may flow in either direction: from the corporation to the director (the more common scenario in closely held corporations), or from the director to the corporation to provide working capital or bridge financing.

The Canadian tax treatment of director loans is governed primarily by subsection 15(2) of the Income Tax Act (R.S.C. 1985, c. 1 (5th Supp.)), which provides that where a corporation makes a loan to a shareholder (including a director who is also a shareholder), the full amount of the loan is included in the shareholder's income for the tax year in which the loan was made, unless the loan is repaid within one year after the end of the corporation's tax year in which the loan arose. This is a strict rule: the full principal amount of the loan (not just the interest) is included in income if the repayment deadline is missed.

In addition, subsection 80.4(2) of the Income Tax Act deems a taxable benefit to arise where a corporation makes a loan to a shareholder or connected person at no interest or at interest below the CRA prescribed rate. The deemed benefit is calculated quarterly as the difference between interest at the prescribed rate and the interest actually paid, and is included in the shareholder's income. The prescribed rate is set quarterly by the CRA based on the yield on 90-day Government of Canada Treasury Bills.

Corporate law requirements also apply. Under the Canada Business Corporations Act (CBCA) section 120 and equivalent provincial Business Corporations Act provisions, a director who has a material interest in a transaction with the corporation must disclose the interest to the board and generally refrain from voting on the approval resolution. The board resolution authorizing the loan should document the business purpose, the terms, and compliance with the conflict of interest disclosure requirements.

A well-drafted Director's Loan Agreement provides evidence of a bona fide loan arrangement, supports compliance with the CRA shareholder loan rules, and protects both the corporation and the director in the event of a CRA audit or a dispute among shareholders.

A Director's Loan Agreement is needed whenever a Canadian corporation makes a loan to one of its directors, or a director lends personal funds to the corporation, and the transaction is separate from salary, dividends, or expense reimbursements.

Common situations include: a director-shareholder of a closely held corporation withdrawing funds for personal use in anticipation of a future dividend declaration; a founding director providing bridge financing to the corporation during a startup phase; a corporation formalizing an existing informal arrangement under which the director has been borrowing from or lending to the company without documentation; and a corporation preparing for a financing round or sale where due diligence will examine all related-party transactions.

A written Director's Loan Agreement is essential because the CRA applies the subsection 15(2) shareholder loan inclusion rules strictly. Without documentation of the loan terms, repayment schedule, and interest rate, the CRA may include the entire loan amount in the shareholder's income for the year the loan was made, even if the money was intended as a temporary advance. The deemed interest benefit under subsection 80.4(2) adds a further layer of complexity: interest must be charged at or above the prescribed rate and paid within 30 days after each calendar year to avoid a taxable benefit.

The CBCA and provincial BCAs require directors to disclose material interests in transactions with the corporation and to comply with fiduciary duties of care and loyalty. A written loan agreement, supported by a board resolution, demonstrates compliance with these requirements.

A Director's Loan Agreement for a Canadian corporation should contain several key provisions to ensure compliance with the Income Tax Act and corporate law.

The parties clause should identify the corporation (by full legal name, jurisdiction of incorporation, and registered office address) and the director (by full legal name and residential address). The loan direction should be clearly specified.

The loan amount and drawdown clause should state the principal sum in figures and words, the method of advance, and the drawdown date. The board approval clause should confirm board authorization and the date of the resolution.

The interest clause should specify the annual interest rate, which must equal or exceed the CRA prescribed rate to avoid the deemed interest benefit under subsection 80.4(2) ITA. Interest must be paid within 30 days after each calendar year.

The repayment clause should specify the repayment schedule. For company-to-director loans, repayment must be completed within one year after the end of the corporation's fiscal year in which the loan was made to avoid income inclusion under subsection 15(2) ITA.

The tax acknowledgment clause should reference subsection 15(2) (shareholder loan inclusion), subsection 80.4(2) (deemed interest benefit), subsection 15(2.6) (exceptions for bona fide employee loans), and paragraph 20(1)(j) (deduction for repaid amounts).

The governing law clause should specify the governing provincial law and the federal laws of Canada applicable therein.