Often it will be necessary for an entrepreneur to personally
guarantee the obligations of a private corporation. Our experienced
Toronto tax lawyers can carry out the income tax planning, provide
tax help and draft the guarantee to ensure that any guarantee
payments made are tax deductible to the payor.
Generally speaking, a taxpayer who is required to honour a
Guarantee is considered to have acquired a debt at the time that
the Guarantee is honoured equal to the amount of payment made
pursuant to the Guarantee.
Whether the debt so acquired is a bad debt is a question of fact
in each case. If the Guarantee had been given for adequate
consideration it will generally be considered to have been given
for the purpose of gaining or producing income. Therefore, if the
acquisition of a debt in these circumstances gives rise to a bad
debt, any loss arising from a payment required by the Guarantor
under that Guarantee will be considered to be a deductible capital
loss. In certain circumstances, discussed in CRA Interpretation
Bulletin 239R2, loan guarantees for inadequate consideration may
also give rise to capital losses. This occurs where:
The corporation (or partnership) which benefited from the
Guarantee used the borrowed funds to earn income
The corporation could not obtain financing at competitive rates
without the Guarantee
The corporation permanently ceased to carry on its
The loan from the shareholder to the corporation did not result
in any undue tax advantage
From an income tax planning point of view it is generally
advisable to have a written guarantee agreement drafted by one of
our Toronto tax lawyers and for a reasonable fee to be charged and
paid by the corporation to the guarantor. This fee can in effect be
part of the annual compensation paid by the corporation to the
owner-manager. It would be paid as a guarantee fee instead of as a
salary or bonus. If you require tax planning advice related to a
corporate guarantee contact our tax lawyer Toronto firm for tax
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).