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[OP]
Deal Addict
Dec 13, 2007
1713 posts
162 upvotes
Toronto

Corp to corp loan treatment.

Consider the following scenario:

1. There is an operating corp that generates income.

If a shareholder takes money out of the corp as a loan, that is basically is not allowed, i.e. must be repaid within a year.

But now let's add
2. Hold co, that owns a building, rents it to opco, and basically operates at no profit.
3. shareholder lent large amount to the opco so it could buy the building
4. opco also lent a bit of money to hold co.

Now, consider that shareholder, instead of taking money directly from opco, opco instead lends more money to the hold co, and the hold co repays some of it's loan to the shareholder. In this case, shareholder does not technically loans from the opco. instead opco loans to the holdco.

Is this legit? Sounds like a loophole to me :) I mean, even though hold co is repaying it's loan, it still owes the same amount, just to a different entity.
4 replies
Member
Jan 18, 2017
352 posts
260 upvotes
This happens all the time. It's normal.

Pro-tip: paper the loans correctly, just in case.
slavka012 wrote: Consider the following scenario:

1. There is an operating corp that generates income.

If a shareholder takes money out of the corp as a loan, that is basically is not allowed, i.e. must be repaid within a year.

But now let's add
2. Hold co, that owns a building, rents it to opco, and basically operates at no profit.
3. shareholder lent large amount to the opco so it could buy the building
4. opco also lent a bit of money to hold co.

Now, consider that shareholder, instead of taking money directly from opco, opco instead lends more money to the hold co, and the hold co repays some of it's loan to the shareholder. In this case, shareholder does not technically loans from the opco. instead opco loans to the holdco.

Is this legit? Sounds like a loophole to me :) I mean, even though hold co is repaying it's loan, it still owes the same amount, just to a different entity.
______
Canadian & US tax guy (CPA)
Member
User avatar
Jun 3, 2008
214 posts
220 upvotes
Newmarket
crossborderguy wrote: This happens all the time. It's normal.

Pro-tip: paper the loans correctly, just in case.
To confirm, intercompany loans between related companies may be interest free, correct?

In terms of papering the loans, this would be a document detailing the loan amount and specifics (rate, term etc.)? Are meeting minutes required?
Member
Jan 18, 2017
352 posts
260 upvotes
Generally speaking, yes interest-free loans are fine.

Having said that, the more detail you can include that shows that the loan is bona fide etc (read: the more papers with stuff on them about the loan, the better). Minutes are always good to have.

braveheart2006 wrote: To confirm, intercompany loans between related companies may be interest free, correct?

In terms of papering the loans, this would be a document detailing the loan amount and specifics (rate, term etc.)? Are meeting minutes required?
______
Canadian & US tax guy (CPA)
Deal Addict
Aug 28, 2007
1937 posts
317 upvotes
Calgary
Moving money between related corporations is one of Warren Buffett's not-so-secret strategies for success. Despite top quality naysayers commenting that his ideas are dated, their multi-decade success are worth understanding.

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