Money moves between owners and their corporations all the time. You lend the company money to get it started or through a slow quarter, or the company advances you money before year-end. Each of those is a loan, and each should be approved and recorded.
The resolution matters most at tax time. Without it, a loan to you can be taxed as income, and a loan from you can be hard to prove when you want the money back. Because the owner is usually on both sides, the conflict-of-interest rules also apply.
- Approved by
- The directors, after the interested director discloses the interest
- Signed by
- Every director entitled to vote, if passed in writing; sometimes the shareholders too
- Filed with the government
- No
- Paper it with
- A promissory note or loan agreement
- Main tax risk
- In Canada, a loan to a shareholder not repaid within a year after the corporation’s year-end is taxed as income
When you need one
- You lend money to the corporation: start-up funding, covering payroll, buying equipment.
- The corporation lends money to you, or pays a personal expense that you will repay.
- A holding company and its operating company lend money to each other.
- Your accountant records a year-end balance in the shareholder loan account and you want the terms on record.
- You are converting a shareholder loan into shares, or forgiving it. Talk to your accountant first: both have tax consequences.
Who approves it
A loan is a contract between the corporation and a shareholder who is usually also a director. Corporate statutes let the directors approve it, but the director who is lending or borrowing has a conflict of interest, and each statute says what that director must do.
| Jurisdiction | Rule |
|---|---|
| Canada, federal (CBCA) | The interested director discloses the interest in writing or in the minutes and doesn’t vote (s. 120(1), (5)). If no director is free to approve it, the shareholders can confirm it by special resolution after disclosure, if it was reasonable and fair to the corporation (s. 120(7.1)). |
| Ontario (OBCA) | The interested director discloses and doesn’t vote (s. 132(1), (5)). If every director has to disclose, only the shareholders can approve it (s. 132(5.2)), so a sole director-shareholder signs a shareholders’ resolution too. |
| British Columbia (BCBCA) | A director who is the company’s sole shareholder has no disclosable interest (s. 147(2)(e)). Otherwise the director discloses; if all the directors are interested, they may all vote (s. 149(3)). |
| Alberta (ABCA) | The same disclosure and voting rule as the CBCA (s. 120). A loan to a shareholder, director or their associate must also be disclosed to the shareholders (s. 45). |
| Quebec (QBCA) | The director discloses the nature and value of the interest and doesn’t vote (ss. 122, 127). If every director must abstain, the shareholders approve it by ordinary resolution (s. 129). |
| Delaware (DGCL) | A corporation may lend to an officer or employee when the directors judge it may benefit the corporation (s. 143). A transaction with a director is protected if disinterested directors or stockholders approve it after disclosure, or if it is fair to the corporation (s. 144). |
| Model Act states (MBCA) | A director’s conflicting interest transaction is protected by disclosure and approval of qualified directors or shareholders, or by being fair to the corporation (ss. 8.60 to 8.63). |
When the owner is the only director and shareholder, there is no one independent to approve the loan. Record the disclosure anyway, approve it as both director and shareholder where the statute calls for it, and make sure the terms would look fair to an outsider.
Before you sign
- Set real terms: the amount, the interest rate (or that there is none), when and how it is repaid, and whether it is secured.
- Sign a promissory note or loan agreement alongside the resolution. The resolution approves the loan; the note is the loan.
- Check your shareholder agreement, which may require other shareholders to approve loans to an owner.
- Ask your accountant about timing and interest before the corporation lends you money (see the tax rules below).
The tax rules to plan around
- Canada, loans to shareholders. A loan from the corporation to a shareholder, or to someone connected with one, is included in the shareholder’s income (s. 15(2) of the Income Tax Act) unless it is repaid within one year after the end of the corporation’s tax year in which it was made, and the repayment isn’t part of a series of loans and repayments (s. 15(2.6)).
- Canada, employee exceptions rarely help owners. Loans to buy a home, a car for work or shares of the employer can be excluded, but only if the loan was received because of employment and not because of shareholdings, with real arrangements to repay it (s. 15(2.4)).
- Canada, low-interest loans. If a shareholder loan isn’t taxed as income but carries no interest or less than the prescribed rate, the shareholder has a taxable benefit equal to the missing interest (s. 80.4(2)).
- Canada, loans to the corporation. You can withdraw what you lent without tax. Interest the corporation pays you is taxable income to you.
- US, loans to shareholders. The IRS can treat a loan to a shareholder as a disguised dividend or salary if it doesn’t look like real debt: a written note, interest, a repayment schedule and actual payments all help. A loan at less than the applicable federal rate can create imputed interest; loans totalling $10,000 or less between the corporation and a shareholder are exempt (26 U.S.C. § 7872(c)(1)(C), (c)(3)).
Sample wording
Adapt the wording to your corporation: replace everything in square brackets, and check your articles, bylaws and any shareholder agreement first. Each person signs and dates a copy, and a scanned or electronic signature is usually fine.
Resolutions of the directors of [Corporation name] (the “Corporation”)
WHEREAS [shareholder name] (the “Lender”), a [director and] shareholder of the Corporation, has offered to lend the Corporation $[amount], and [has disclosed to the directors the nature and extent of the Lender’s interest in the loan];
BE IT RESOLVED THAT:
1. The Corporation borrow $[amount] from the Lender on the following terms: interest at [rate]% per year [or: without interest], repayable [on demand / on or before date / in instalments of $amount], [unsecured / secured by description].
2. The form of promissory note presented to the directors is approved, and [name and title] is authorized to sign it on behalf of the Corporation.
The foregoing resolutions are passed by the signatures of all the directors of the Corporation, as of [date].
______________________________
[Name], director
______________________________
[Name], director
If the lender is the only director, or every director has an interest, add a shareholders’ resolution approving or confirming the loan. In Ontario it is required (OBCA s. 132(5.2)).
Action by unanimous written consent of the board of directors of [Corporation name] (the “Corporation”)
WHEREAS [name] (the “Borrower”), an officer and stockholder of the Corporation, has requested a loan of $[amount], and the material facts of the Borrower’s interest have been disclosed to the board;
RESOLVED, that the board, having determined that the loan may reasonably be expected to benefit the Corporation, approves a loan to the Borrower of $[amount], bearing interest at [rate]% per year (not less than the applicable federal rate), repayable [in monthly instalments of $amount / on or before date], and evidenced by a promissory note in the form presented to the board; and
RESOLVED FURTHER, that [name and title], other than the Borrower, is authorized to sign the note and related documents on behalf of the Corporation.
This consent is signed by all the directors of the Corporation, is effective as of [date], and will be filed with the minutes of the proceedings of the board.
______________________________
[Name], director
______________________________
[Name], director
After you sign
- Sign the promissory note and keep it with the resolution.
- Move the money by bank transfer, so there is a clear record, and record the loan in the books.
- Make the payments on schedule and keep proof. In Canada, diarize the repayment deadline: one year after the end of the corporation’s tax year in which the loan was made.
- When the loan is repaid, record it, and mark the note as paid.
What to keep in your minute book
- The signed resolution, with any written disclosure of interest.
- The promissory note or loan agreement, and any security documents.
- A running record of advances and repayments, reconciled with the shareholder loan account at each year-end.
Common questions
Do I need a resolution if I just put money into my own company?
You should have one. Without a record that the money was a loan, it can be hard to show later that the corporation owes it back to you, rather than that you contributed it as capital. A short resolution and a promissory note take care of it.
Can I take money out as a shareholder loan instead of salary or dividends?
Only temporarily. In Canada, a loan the corporation makes to you is taxed as income unless it is repaid within one year after the end of the corporation’s tax year in which it was made, and paying it back with a new loan doesn’t count. In the US, the IRS can recharacterize a loan without real terms as a dividend or compensation.
Should a shareholder loan charge interest?
Not necessarily, but interest-free loans from the corporation to you have tax consequences in both countries: a taxable benefit at the prescribed rate in Canada, and imputed interest at the applicable federal rate in the US for loans above $10,000. Loans you make to the corporation can be interest-free.
What if I am the only director and shareholder?
You approve it yourself, but still record your interest and set fair terms. In Ontario, when every director has an interest, the loan can only be approved by the shareholders, so sign a shareholders’ resolution as well. In British Columbia, a director who is the sole shareholder has no disclosable interest.
This page is general information about corporate resolutions in the United States and Canada, not legal or tax advice. The sample wording is a starting point: your articles, bylaws and any shareholder agreement may require something different, and rules change over time. For advice about your corporation, speak with a qualified lawyer or accountant.
Sources
- Canada Business Corporations Act, section 120
- Ontario Business Corporations Act, section 132
- British Columbia Business Corporations Act, sections 147 to 149
- Alberta Business Corporations Act, sections 45 and 120
- Quebec Business Corporations Act, sections 122 to 129
- Delaware General Corporation Law, sections 143 and 144
- Model Business Corporation Act (American Bar Association), sections 8.60 to 8.63
- Income Tax Act (Canada), section 15
- Income Tax Act (Canada), section 80.4
- 26 U.S. Code § 7872, below-market loans