Shareholder Loan Agreement

What is a Shareholder Loan Agreement?

A Shareholder Loan Agreement is a document used when a shareholder lends money to a corporation. The loan could be for any reason related to the corporation's business activities, such as purchasing new inventory, equipment, or assisting with ongoing obligations.

What must a Shareholder Loan Agreement contain?

A Shareholder Loan Agreement must contain the following:

• Identity of the corporation and the shareholder;
• The principal amount of the loan;
• The interest rate of the loan;
• The term of the loan (duration); and
• The repayment method and the timing of the payments.

What is the difference between a Shareholder Loan Agreement and a standard Loan Agreement?

A shareholder loan agreement is a very specific contract that applies only to shareholders of a corporation. The shareholder is agreeing to lend money to the corporation in which it owns shares. On the other hand, a Loan Agreement is a document used for general loans between any borrower and lender, and the loan can be for any reason. For example, a small business corporation can make a loan to a colleague, friend, family member, or anyone else in need of money.

Who can enter into this Loan Agreement?

Only the shareholder lending money and the corporation receiving the loan can enter into a Shareholder Loan Agreement. The shareholder may be either:

• An individual: the shareholder may be an individual
• A corporation: the shareholder may be a corporation itself. This means that a corporation, instead of an individual or other entity, owns the shares in the corporation being loaned money.
• A trust: a trust may also be a shareholder of the corporation. This means that the trustee of the trust can be a shareholder who loans money to the corporation.

The signatories to the contract must be at least majority age and not under disability. The ages of majority are as follows:

• Alberta, Manitoba, Ontario, Prince Edward Island, Quebec, Saskatchewan: 18 years old.
• British Columbia, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Nunavut, Yukon: 19 years old.

What has to be done after the Agreement is ready?

After a Shareholder Loan Agreement is ready, both the shareholder and the corporation must sign the document, either electronically or physically. Each party will need to keep a copy of the document for their records.

Which laws are applicable to a Shareholder Loan Agreement?

A Shareholder Loan Agreement is governed by the applicable business corporations act, general contract law, the Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.)), and more. The applicable statute depends on where the incorporation took place. The pieces of legislation governing shareholders and corporations are as follows:

• Ontario: Business Corporations Act, R.S.O. 1990, c. B.16
• Manitoba: The Corporations Act, CCSM c C225
• Alberta: Business Corporations Act, RSA 2000, c B-9
• Saskatchewan: The Business Corporations Act, RSS 1978, c B-10
• British Columbia: Business Corporations Act, SBC 2002, c 57
• New Brunswick: Business Corporations Act, SNB 1981, c B-9.1
• Nova Scotia: Companies Act, RSNS 1989, c 81
• Prince Edward Island: Business Corporations Act, RSPEI 1988, c B-6.01
• Quebec: Business Corporations Act, CQLR c S-31.1
• Yukon: Business Corporations Act, RSY 2002, c 20
• Northwest Territories: Business Corporations Act, SNWT 1996, c 19
• Nunavut: Business Corporations Act, SNWT (Nu) 1996, c 19
• Newfoundland and Labrador: Corporations Act, RSNL 1990, c C-36
• Canada: Canada Business Corporations Act (R.S.C., 1985, c. C-44)

Additionally, interest rate cannot be charged in excess of the amount prescribed for under the Criminal Code (R.S.C., 1985, c. C-46).

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